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The recurrence of financial crises

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  1. Introduction
  2. The 1929 crises
  3. The first characteristic of financial crises
  4. The diversity of financial crises
  5. The first economic abuses
    1. The race for returns
    2. Leveraging
    3. The advances in financial engineering
  6. The psychological tendencies
    1. Mimicry
    2. Contagion
  7. The liberalization of international capital movements
    1. The first real threat
    2. The capital mobility
    3. The monetary and financial crises
  8. Levels of intervention
    1. The need for a lender of last resort
    2. The need to regulate financial markets
  9. Conclusion

Financial crises have multiplied in the 1990s successively affecting the so-called emerging countries. The crisis experienced by Mexico in 1994, Asia in 1997, Russia in 1998 and Brazil in 1998 and 1999 are still fresh in the memory of economists and people in these countries. The impact of all these crises on the real economy has been significant, as they have all caused deep recessions.

[...] In addition to facilitating action on information it can also act for the prevention of financial crises by regulation. It can be externally driven by monetary authorities who then set the rules of liquidity, solvency, risk division, deposit insurance, etc or be regulated internally within institutions. Prudential regulation involves encouraging banks and other financial market participants to recognize their risks and enabling authorities to monitor the currents that threaten the stability of the system and correct them. This is to stop the players from playing "all out" and taking unnecessary risks. [...]

[...] While the long-term capital investments are essential to growth, but short-term ones give rise to volatile exchange rates the influence interest rates, thereby multiplying the risk of financial crises on three levels. Firstly they may cause a crisis of balance of payments if the external debt becomes too large compared to the national economy. Secondly they may cause a liquidity crunch, in case of excessive short-term external debt relative to liquid foreign assets. Finally, a domestic banking crisis cannot be avoided in cases where national banks have borrowed in international currency and loaned in local currency. [...]

[...] It is a mirror of everything that is supposedly rational economic and financial in the universe¸ but is present in a world where feelings are given precedence over facts. Thus, the sacrosanct information needed on a daily basis by financial markets such as the outlook for profits of a company or the latest indicators on the health of the economy of a country are relegated to second place. Then the "feeling" takes over, and financiers prefer to "feel the markets," by listening to what their colleagues are doing, and do as much as possible the same thing. [...]

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