• November 10, 2021

The Global Financial Crisis: Looking Back to 2014


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. Left unchecked, the situation can lead to declining asset values ​​and massive withdrawals by investors. The result is massive hysteria that plunges 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 suffer if financial markets plummet. Recession always occurs after a peak is reached in the business cycle. There is a decline in income and employment after each expansion. The recession occurs when this scenario occurs with wages and the prices of goods that remain the same as in the peak period.

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

Are the global financial markets in a tailspin?

All the world’s central banks are in panic mode in the fourth quarter of 2013. All the world’s economies assessed the situation as bleak and embarked on damage control strategies. The big bubble burst story 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 guarantees from China.

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

The current leverage situation is worse than in 2008 due to Fed intervention. However, as seen in recent weeks, the reaction of bonds and equities to the Fed’s market intervention is critical; And if it is removed from the bracket, the entire system may be at risk.

With bond markets collapsing in Europe, there are fears that higher interest rates will follow. This new emerging markets scenario is catastrophic with all the world’s economies frozen in a debt bubble. The world’s central banks can only watch, while losing control of the financial markets. The emerging scenario looks bleak with industry stalwarts saying the situation 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 era before the Federal Reserve. The market was in a panic and people were dumping their assets, driving prices down to unpredictably low levels. What happened then was that people were going 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 happened in 2008, 1987, 1929, 1907, and so on. The bank run will be systemic, credit will be frozen, large numbers of people will lose their jobs, and millions of people will see their lifetime savings decimated. It happened in the 19th century when central banks didn’t exist yet, and it didn’t stop even after the emergence of the Fed in 1913.

There is no trigger factor that determines whether the crisis has started. Depositors at banks such as Wells Fargo, Citibank and Bank of America did not panic to alert the nation. It was the Fed that realized the major banks were undercapitalized, over-leveraged and insolvent before it came up with a rescue package.

The economic debacle of 2007-2008 hit the stock market when it realized that 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 it suffer immensely. What saved the day were guarantees made by the Fed and the Treasury on the stock exchanges, 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 more seriously discussed today that to save financial markets from future runs, there must be enough capital or back-up funds to meet your obligations from the run. Losing trust in banks and lenders who withdraw their funds from one or more banks can be disastrous for the banking system. Banks need continuous short-term inflows of funds to meet their long-term obligations. Without this continuity, it would be inevitable that another bank run would begin.

Can the global economy handle another financial crisis?

It must be reiterated that the world economy is connected to what many experts believed. While it is important to stay on top of how the US economy is doing, it is still part of the global economy where many players rank at the top. China had become an economic dragon that rivaled that of the United States for the top spot. China has a presence in many parts of the global economy that include the raw materials and materials sectors.

China’s latest moves to move from an outward-driven economy to its domestic markets are causing major problems with its trading partners. China’s Gross Domestic Product is watched more closely as the world stage is heavily dependent on its rapidly growing economy. The financial debacles in China are watched closely by global markets, as their decline could wreak havoc on all the world’s economies.

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