Overview

A financial crisis occurs when the value of a country’s financial assets falls rapidly. The crisis is often associated with bank runs, investor panic and massive withdrawal of funds from banking institutions. This scenario predicts that everything is going downhill, hence the need to withdraw all savings and investments from all financial sectors.

When assets are deemed to be overvalued, rapid sell-offs occur, leading to a financial crisis. If left unchecked, the situation may further lead to declining asset values ​​and massive withdrawals by investors. The result is mass hysteria that sends the economy into recession or depression.

The economy is in a tailspin if:

• There is a significant drop in the housing sector;
• An increase or increase in the number of unemployed;
• There is an apparent decline in economic output.

Investments can be affected if financial markets take a nosedive. The recession always comes after a peak is reached in the business cycle. There is a decline in profits and employment after each expansion. The recession occurs when this scenario occurs with wages and the prices of goods being the same as in the peak period.

This then leads to a declining economy resulting in a trough or depression. The duration of the depression is critical, as it determines the severity of the bottoming out of employment and economic output, while the next recovery cycle is expected to begin.

Are the world’s financial markets in a tailspin?

All the world’s central banks are in a state of panic in the fourth quarter of 2013. All the world’s economies assessed the situation as bleak and embarked on damage control strategies. The big story about the bubble burst centered on China’s interbank liquidity problems and spiraling overnight interest rates.

China’s stock market is now in free fall and is down 20% today. The Central Bank of China tried to appease investor confidence by assuring the market that there is liquidity in the banking sector. But the market did not react and investors were cautious despite reassurances from China.

In the United States, there were acrimonious debates about the Fed’s ability to rein in quantitative easing (QE) from late 2013 to mid-2014. Based on historical data, the Fed failed miserably to stimulate economic growth. It had only succeeded in creating bubbles in the stock market while draining the financial markets of high-quality collateral.

The leverage situation today is worse than it was in 2008 due to Fed intervention. However, as seen in recent weeks, the reaction of bonds and stocks to Fed intervention in the market is critical. ; and if you remove support, your entire system may be at risk.

With the bond markets in Europe collapsing, there are fears that higher interest rates will come next. This new emerging market scenario is catastrophic with all the economies of the world frozen in a debt bubble. The world’s central banks can only watch as they lose control of the financial markets. The emerging scenario looks bleak, and industry stalwarts say things may be worse than what happened in 2008.

The economic crisis in 2007 and 2008

What happened in this two-year period may be similar to the pre-Fed era. The market was in a panic with people divesting themselves of their assets, sending prices down to unpredictably low levels. What happened then was that people came out, all at the same time. weather. The mass hysteria affected short-term instruments such as repos, bonds, stocks, commodities and real estate.

The wave of terror affected not only short-term investments but also long-term instruments. This global debacle caused the collapse of key companies such as Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, and Countrywide Financial.

The next financial crisis is expected to be the same one that occurred in 2008, 1987, 1929, 1907, and so on. The bank run will be systemic, credit will freeze, large numbers of people will lose their jobs, and millions of people will see their life savings decimated. It happened in the 19th century when central banks didn’t exist yet, and it didn’t stop even after the Fed came along in 1913.

There is no trigger factor that would determine if the crisis had started. Depositors at banks like Wells Fargo, Citibank and Bank of America did not panic to alert the nation. It was the Federal Reserve that realized that the major banks were undercapitalized, overleveraged and insolvent before presenting a bailout package.

The 2007-2008 economic meltdown hit the stock market when it realized the banking community did not have the resources to absorb the run. What happened was a lack of confidence in the stock market that made him suffer immensely. What saved the day were the guarantees made by the Fed and the Treasury in the stock markets, which would guarantee bank deposits of up to $250,000 and inject billions of capital to save the country from total financial collapse.

It has been very seriously argued today that in order to save financial markets from future runs, there must be enough capital or strength funds to meet your run obligations. Losing trust in banks and lenders who withdraw their funds from one or more banks can be disastrous for the banking system. Banks need the continuous flow of short-term inflows of funds to meet their long-term obligations. Without this continuity, another bank run would inevitably begin.

Can the global economy handle another financial crisis?

It must be reiterated that the world economy is connected than many experts believed. While it is important to be aware of how the US economy is doing, it is still part of the global economy where many players are positioned at the top. China had become an economic dragon, rivaling the US for the top spot. China has a presence in many parts of the global economy including raw materials and material sectors.

China’s most recent moves to shift from an outward-driven economy to its domestic markets is causing significant problems with its trading partners. China’s Gross Domestic Product is watched more carefully as the global arena is highly dependent on its rapidly growing economy. The financial debacles in China are closely watched by the global markets, since its fall could wreak havoc in all the economies of the world