Financial Crisis with the emergence of modern age is invariably interwoven with the fabric and fate of modern society especially by way of financial contagion as it varies markedly from clime to clime .Recessions ,depressions and meltdowns are mere tags and bizarre nomenclatures as variegated portraiture of the business cycle being widely used to classify the gravity of financial crisis at a particular period .They are used to define the precarious climates in which economies might find themselves in the turbulence cycle of free market or other ways round .
In this elaborate piece let us first define the term ‘’Financial Crisis’’ prior to its intricate analysis which is necessary if we are to address ,prevent and if possible prohibit the reoccurrence of the financial crisis and its precarious impact often unbearable especially in the developing countries .
The term ‘’financial crisis ‘’ extremely differs by usage and definition across the world based on the level of each country’s exposure though varied and multidimensional by impact.Altman-1997] describes it as the simultaneous crash of related financial institutions brought down by the action and inaction of investors including its speculators and depositors probably stricken under duress in an attempt to liquidate their assets or offload their savings into safer assets .Another study captured the intensity and broadness as it applied to diverse climate confronted by crisis in which some financial institutions lose a larger chunk of their assets .For instance ,according to Aliber -2005] banking panics were responsible for the crash and many financial crisis of the 19th and 20thcentury and these panics also coincided with the recessions of the period .Financial crisis also includes stock market crash and financial bubble bursts ,currency crisis ,sovereign defaults –Valencia-2008].
Cases of financial crisis abound worldwide ,over the last few centuries at least eight centuries have occupied the attention of nations in the international community as they grew so despondent and desperate for faster solution to prevent future reoccurrence .The fate of modern society hangs in the balance and crises have persisted as it were from the ancient.This speaks volume of the fundamental weakness of modern civilization.
Wikipedia refers financial crisis to ‘’a broadly applied variety of situations in some financial institutions that suddenly loose a large part of their assets or some financial assets lose a larger chunk of their nominal value .It also admits that in the 19th and 20thcenturies ,banking panics were associated with diverse financial panics and almost all panics coincided with recessions .Stockmarket crashes ,financial bubble bursts, sovereign defaults and currency crisis are similar types associated with such crisis .It directly occurs as a result of loss of paper wealth value but not necessarily impact negatively yet on the real economy.As crisis persists and defy all solution , the fundamental fabric of mordern civilization is similarly threatened .
It also refers to a situation in which the supply of money is outpaced by the demand for money .This now indicates liquidity evaporation orchestrated by mass withdrawals of Banks ‘ available money as they sell other short term investments to raise cash to bridge the shortfall and avoid impending crash.It is a situation in which assets value drops so easily and rapidly and also includes the erosion of the value of financial institutions. It is caused by bank runs and bank panics in which investors sell off assets or withdraw money from savings account as they envisage future drop in the value of these assets .should they remain at that particular period , in such ailing institutions panics or runs can be caused as a result of assets being overvalued or directly caused by investor vulnerable behavior .Lower asset prices can be caused by a rapid string of sell off including more savings withdrawals.If prolonged and unchecked ,economy can dovetails into a recession and even a depression .Lack of necessary liquidity in financial institutions can be attributed to economic recession or depression .Financial crisis may be
caused by natural disasters ,negative news among unknown causes .It causes a decrease in economic activities and can easily also reinforced itself .It refers to acclimate in which a large financial institutions lose a large part of its value or some institutions through financial contagion .Financial crisis is different from economic crisis which affects the entire economy .Its rampant occurrence in modern society tends to affect specific sectors of the economy .It can hit a single sector and not necessarily multiple sectors .
There is no doubt that if financial crisis persists ,it leads to economic crisis .The global financial crisis of 2008 was caused by irresponsible debtors and if trends continue ,it can perpetrate something worse than a depression .Before getting down to the brass tacks to unleash financial crisis voluminous historical exposition ,let us first observe business cycle and then types of financial crisis.For instance ,since 1870,real gross national products –GNP in the United States grew by an average of two percent per annum though it has not been smooth neither steady nor stable.These alternating period of slump ,rise and fall,recovery and succession of ups and downs movement is often regarded as Business cycle .Ordinarily ,it is expected as this influences recessions and depressions and minor economic slumps and crisis.
Business cycles have much in common ,they also vary and complex in size and depth ,have never being identical let alone precise and regular and also vary in duration and pattern of occurrence .Economists try as much as possible to forecast the movement and twists and turns of the economy .In most cases even when velocity is noted disputations often occur about its pace,longevity,level of stability and steadiness.
Ordinarily ,as the periodical ups and downs of economic activity market forces rational or irrational immensely contributed to the configuration and reconfiguration of the nature of business cycle at a time utilising the structural imbalance between aggregate supply and aggregate demand curves .The interaction between these curves tend to move economy forward or backward.
In this context ,business cycle passes through four stages and subsidiary cycles .This ranges from trough to expansion, peak and then contraction.Trough indicates a low part of the business cycle and may be called a recession,for a short term drop or for at least two or three consecutive quarters or can be termed as depression for a longer period ,very deep in decline like the great depression of 1930s .In this scenario business activity often drops ,characterized by closure of factories ,production and workforce reduction including productivity decline and high unemployment .The situation is also characterized by drops in aggregate demand due to contraction on aggregate consumer spending.Consequently the stagnation of consumer demand lowers prices to attract unwilling customers and stimulates inventories’reduction .Other features such as poor profits ,low investment ,undercapitalization and gross underinvestments cannot be easily detached from this stage .
As soon as economy cools off ,it enters into the second phase –expansion .It start slowly with its silver linings as merchants who once sold off excess inventories during recession will now restart reordering ,reinvestments and gradually restocking their shelves . New investment access, profiting from the launching of government programs to stimulate spending automatically boosts the economy .The return of animal spirits in a conducive environment can boost the dire need to borrow repayable in anticipation of future profits fuels aggregate demand in the long run.This upside is attributed to output expansion ,income growth ,and increase in business investment and high employment.The growth in aggregate demand in the long run is responsible for bigger drops in high unemployment .Cheap funds mobilises investment at a relatively low cost .The scenario drives up consumer prices faster and creep up wages even faster.
Peak is the final expansion and the limit of expansion which is characterized by scarcity of some factors of production further growth cannot continue when full employment of available resources had been reached.The peak cannot go on forever like the trough.Challenges abound such as the corporate high costs of labour and raw materials .Consequently ,the rate of aggregate demand begins to slow down by tight labour cost and equally slowing down the rate of finance.Car sales and housing prices also drop giving smart investors the capability to read the danger signals.
Contraction is the result and opposite of the peak period .At this stage ,characterized by excess inventories ,slumping sales ,investment automatically slumps ,the same for production as aggregate supply exceeds aggregate demand .As the flipside of expansion phase , optimism vamoosed at the end of contraction period .These stages are perennially recycled.
We agree that business cycle swings is the origin of financial crisis including the unpredictability and the unworkability of market forces that aggravated this position so that it will be very hard to predict the unforeseeable years ahead .Our earlier assertion noted that it is because market forces are not rational .There had been assumption that the hurricane-like and tornado-like natural phenomenon was exerted as a reflection nature’s cause even though it may not comprehended by mankind struggling to survive and simply can do nothing about it.For instance , in the United States ,business cycle recorded runaway boom and bursts from 1815,1837,1893,1907 and then 1929.She experienced financial panics in an alternating periods of prosperity .It is also believed that as an integral part of capitalist enclaves ,no one could out law business cycle .Even the extreme fluctuation that western economists though are controllable have never ceased to spin out of control especially with the emergence of meltdown only indicates the fundamentally nature of free market still requires surgical operation eco-psychiatric rehabilitation not as it were over the previous centuries.Otherwise it ought to be suspended by or for marsolism-a better panacea and can indeed be even by the acrimonious troughs of nature ushering in new trend line.
Since world War 11 the American economy has not experienced a depression of the likes of 1930,apart from its common recessions as recorded in 1949 , 1954, 1958,1961 ,1970,1975,1982,1990-92,and the 1999-2000 dot com burst menace. Though it was claimed that economists who monitored business cycle movement have not been able to do proper curtail and meltdown was a living evidence .As long as recession keeps turning up ,marsolism believes the frequencies and the unpremeditated frequencies of the meltdowns and possible depressions cannot be detached from the unpredictability of business cycles for development or cultural cycle that can acts as neuter to this sole economic is still yet to be theorized and moreso,knowledge cycle as ultimate panacea has not not been theorized either .Any avoidance of this common perils cannot be possible without the adoption of marsolism in a fast changing new world order .
EXTERNAL AND INTERNAL CAUSES OF BUSINESS CYCLE
According to different schools of thoughts the causes of the business cycle have been linked to both internal or external factor-forces beyond the control of the economy. Such as crisis, wars, weather ,foreign trade conflicts , immigration rate and threat, population time bomb, new growth resources ,technological innovations have been linked to these causes .Therefore these external theorists or theories imply that it cannot be controlled or predictable.
The opposing school of thoughts places much emphasis on the external causes such as flow of money theory ,total spending theory and wage rate theory and a host of psychological factors .Either causes of the opposing internal or external have contravened and linked to inequalities of wealth .But does wage ,total spending, and flow of money theory ever really matter? We critiqued data sources and unveil reason .How tenable are they with the benefit of history and the maturity of the millennia?
TYPES OF FINANCIAL CRISIS
Financial crisis offers its manifold and popular types of banking crisis tend to occur when the system is overheated .We shed light on evolution of bank crisis ,
Bank run occurs in a fractional reserve banking system .This entails simultaneous withdrawal of their deposits by a large number of bank clients either by cash demand or funds transfer into government bonds .Consequently , this precipitates a run on the Bank .They can also put money in a safer investment ,a safer institution or precious metals etc
It progresses if not curbed and even far more dangerous ,building its momentum as number of clients withdraw their deposits and potentially default. A bank runs out of cash ,insolvency rears its ugly head as institution reaches for the exit door .Examples of Bank runs such as the United States Bank runs in 1931 and the embarrassing episodes of Northern Rock that happened in 2007 .
In case of Bank panic ,it happens when several Banks experienced Bank runs at the same time As banks experience run and panics , clients withdraw deposits and convert them into cash to escape and this worsens the situation.If prolonged it can lead to systemic banking crisis .Systemic banking crisis indicates that the entire system is technically affected and virtually all banking capital is wiped out .The consequences of bankruptcies can lead to economic recessions as domestic businesses starved of capital and banking system shuts down .If prolonged , depression or greater depression results and the total crash of an economy .
So Banking crisis as a type of financial crisis builds from bank runs into bank panics otherwise known as mass bank runs and then through financial contagion leads to systemic distress .Inspite of the struggle to revamp the quality and quantity of Banking regulation in modern times by policy makers and central bankers ,this form of financial crisis has not yet abated especially in this volatile 21s century .
Another form of financial crisis is the bubble bursts popularly known as speculative bubble.A major contributory factor to this phenomenon is the presence of market buyers who purchase assets in hope of an expectation to sell at a higher rate .This is often preferred instead of future income computation and the amount it can generate during the envisaged period .Of course for every bubble there is a possibility of a crash in assets prices .They can buy as many as they desire but when the sell the market will fall .It s almost pretty difficult to predict the bubble burst outcome the quality of asset prices and its fundamental value .
Speculative bubble burst samples abound worldwide involving bubbles and crashes in the stock market and asset prices crash .For instance Reihart and Rogoff trace inflation to the Dionysius of Syracuse of the 4thcentury BCE which begin the eight centuries in 1258 in addition to the debasement of currency which also occurred under watch of Roman Empire and the remains –the Byzanthine empire .They trace it down to earliest crises onto the 1340 default study of the Bank of England-an indication of her setbacks with France in the hundre years war.Infact the defaults lasted seven defaults and this was by imperial Spain including four under Philip 11 and three under his successors. –
The voluminous trends unmasked the imperfection of free market .Others include -14th century Banking Crisis-the crash of Peruzzi and the Bardi family of Compagnia dei Bardi in 1345, Dutch Tulib bulb crisis in 1630s ,the 18th century crisis such as South Sea Bubble -1720-U.K.,Mississippi Company-1720-France,Crisis Of Amsterdam ,begun by the crash of Leenderert Pieter de Neufville which spread to Germany and Scandinavia ,Crisis Of 1772 was begun by the crash of Bankers Neal ,James ,Fordce and Down ,Panic of 1785 and 1792 in United States,,Panic Of 1796 -1797 in both U.K. and U.S.,Danish State Bankruptcy of 1813,Post-Napoleonic depression –Post 1815 Panic of 1819-Bank failures precipitated by U.S.recessions and led to first boom to burst economic cycle ,panic of 1825 in which almost banks failed including Bank of England a pervasive economic threat,Panic of 1837-another recession linked Bank failures succeeded by 5 year depression ,Panic of 1847-unmasked the crash of financial markets in the U.K.which truncated the 1840s railway industry boom ,Panic of 1857-a recessionary Bank failures ,Panic of 1866 was a global financial downturn which followed the failure of Overend,Gurney and Company in London ,Long Depression-1873-1896,Panic of 1873-Bank failures linked also to recession in the U.S.seconded by 4 years depression ,Panic of 1890,Recessionary panic of 1893, Australian Banking crisis of 1893,Panic of 1896.
Now in the 20th century others include ,the panic of 1901,another American recession was begun by the battle for financial control of Northern Pacific Railway ,Panic of 1907-the last recession prior to great depression ,German inflationary crisis of 1920s, Wall Street crash of 1929 and Great Depression of 1929-1945-the worst in modern history ,the crash of Vienna Stock market on Black Friday , 9th of May ,1972,1973 oil crisis,1973-74 stock market crash caused by oil crisis ,1973-75 Secondary Banking crisis ,Latin America debt crisis in 1980s beginning from Mexico in 1982-the Mexican weekend ,Bank Stock crisis-Israel-1983 ,the Japanese Bubble burst of 1980s and the 90s,1987-Black Monday as the largest one day percentage decline in Stock market history ,1989-91 U.S. Saving and Loans crisis,Scandinavian Banking crisis of early 90s involving Swedish and finish ,Early 90s recession,1992-93-Black Wednesday –a sort of speculative attacks on European Exchange rate Mechanism ‘s currencies,1994-95 Mexican crisis ,Asian 97-98 financial crisis led to Asian Banking crisis and the Russian financial crisis .In the 21st century,the Turkish 2001 economic crisis , 1999-2002 Argentine economic crisis ,the 2000/2001recessions and dotcom bubble and the asset price bubble and late recessions-2000 which caused the real estate boom in America,energy crisis of 2000,the Indian property bubble of 2005,the British property bubble of 2006,Irish property bubble of 2006.housing bubble , U.S.housing bubble of 2007,the former Florida Swampland real estate bubble ,Spanish property bubble of 2006,China Stock and property bubble of 2008 ,Rhodium bubble of 2008, the Uranium bubble of 2007, the 2008 Subprime mortgage crisis in the U.S.,Australian first home buyer property bubble of 2009 , 2007-2008-Global economic and financial crisis ,Icelandic financial crisis -2008-2011,2010 European sovereign debt default crisis till date, Greek Government debt crisis of 2014, Russian financial crisis and Chinese stock market crash of 2015.
INTERNATIONAL CRISIS , SOVEREIGN DEFAULTS AND CURRENCY CRISIS
International financial crisis includes currency crisis , sovereign defaults fall under this survey .While the currency crisis or balance of payment crisis as regarded is a situation in which as a result of speculative attack on its currency a nation is forced to devalue its currency under the regulation of fixed exchange rate.But sovereign default implies that or can be regarded as a situation when a country fails to pay back its sovereign debts but i .These nomenclatures are driven by the voluntary decisions of governments and not voluntary decisions of private investors .This means sovereign investors ‘sentimental change in decisions can result in capital inflows or suddenly fuels capital flight phenomenon .
In the period 1992 /1993 season ,several currencies of the European foreign exchange rate mechanism .Consequently , were forced to devalue or withdraw from it .The currency crisis in Asia in the 1997/98 financial crisis precipated by the devaluation of Thai Batch, the Russian financial crisis of 1998 and those in Latin America defaulted in early 80s was caused by Rubble devaluation etc .The financial crisis of the 19th and 20th centuries were in most cases associated with Banking panics and diverse recession also coincided with the panics .
But the crash of stock market ,financial bubble-burst ,sovereigh defaults and currency crises which directly result in loss of paper wealth which often does not results in real economy changes are often regarded as financial crisis.Many economists have questioned its sources and how it occurs and also development of theories and how it could be prevented .Still they share no consensus on methods of resolution –a major reason why they have persistently occur from time and time calling for economists to unite .,,.
The currency literature explores these details for researchers, central bankers and policy makers .
RECESSIONS AND DEPRESSIONS
In the exposition of the market ,we unmask here the nature of recessions and depressions as noted above .As coined by Anna Schwartz and Milton Friedman –exponent of monetarism –they argued that the crash of 1929 was caused by first bank runs ,then Bank panics and later aggravated by systemic crisis .In the 20s America had 30 ,000 Banks at its peak and by 1933 almost 13,000 banks had crashed in that crime against humanity in the greatest depression in America .Therefore they believed it was caused by policy recklessness basically the monetary policy blunders of The Fed .Ben Benanke former Fed. Chairman under whom meltdown exploded also concurred in like manner that central Bankers were to be held responsible for this fiasco .
During financial crisis government can use its political power to prevent widespread contagion.For instance the Tesobono Swaps which were instrumental to the Tequila crisis in Mexico in 1994 was bailed out by the American presidency to avoid contagion .Unfortunately when Thailand defaulted on the Baht in 1997 and later devalued its currency ,there was no such intervention since they hardly shared borders .
CAUSES AND CONSEQUENCES OF FINANCIAL CRISIS
Rather than been regarded as causes, sources such as Wikipedia among others are strategically contented to regard them as mere types and not causes .The main causes now include –leverage; Strategic complementarity and self fulfilling prophesies ;moral hazard ;Asset liability mismatch ;Herd behavior and uncertainty ; Over regulation, under regulation and regulatory failures ;Systemic risk and financial contagion; theories of financial crisis ; Games of self-coordination ;Herding models and learning models .
But before expository perusal ,it is also expedient that further market or creation of new market for diversification of risk spread or competitive risk spread can better handle these consequences and even avoid or reduce or where appropriate eradicate the causes .On a single day of August 21 , 1998 ,as a result of runaway or break away plain vanilla interest rate swaps ,long term capital asset management LTCM –a large hedge funds an invention of Nobel prize winning economists –futures and options inventors , crashed and lost over 500million dollars in a single trade .With that single collapse ,global apocalypse thus was begun which coincided with the 97/98 Asia financial crisis and in Russia and Brazil.
During the period –Alfred Steinherr –high finance rocket scientist published her book and examined the derivatives markets .In 1998 she noted the sheer size of over the counter-OTC derivatives market in terms of contracts outstanding stood at 80 trillion dollars At the end of 1998 had become the most important market prone to highly contagious and virulent crisis ever experienced in history .Widespread failure of policies and successive policy regimes had persisted and aggravated this climate .To be precise in 2007 OTC derivatives market ballooned to 600trillion dollars .Even after the storms including losses and unwinding that still towered above 500trillion dollars .Yet it has no oversight
We shall examine the causes and consequences of financial crisis as noted below.
THE BANKING SYSTEM STABILITY ,DISTRESS PREVENTION AND THE ROLE OF MONETARY AUTHORITIES IN DISTRESS PREVENTION
Financial panic ,financial distress or banking panic and banking distress is not new nor restricted to Nigeria like elsewhere around the world .Truly speaking ,financial liberalization is a global development that has come to be associated in particular with the economies where banking crisis is prevalent .However , contrary to ancient method of finance ,there is a widespread belief that banks occupy the very pillar of universal economic development and the bedrock of modern civilization .Strategically ,through their indispensable roles of monetary inclined disposition ,wealth and financial engineering technologies and techniques such as creator of money , allocation and mobilization of savings ,principal savings depository ,financial advisory role,credit management ,financial intermediation and the managers of the nation’s payment and settlement system ,they ve been able to oil the wheels of modern commerce .In short , based on this operative architectural mode , it can be also regarded as the general financier of the economy and the lubricator of the financial system .
Nevertheless the Banking system and the stability of banking and the effectiveness of Banking in an economy is quite the same as the quality of Banking regulation in that same clime ;so that alteration or enhancement in the latter has a reverberative effect on the former .In this context the conduct and the practice of banking is subject to existing banking regulation in that clime and with the growth in the quality and quantity of banking services experimented at a particular period. This remains the ultimate risk and boon of banking regulation hinged upon the quality of adjustments ,disclosures , reforms and tardy change that can be mustered at a given period .
Consequently, this entails a robust policy and institutional platform to support regulatory quality ,regulatory arbitration mobilisable in the mechanization of appropriate policy making process ,policy planning ,policy consensus planning , visible policy making critique and rational policy analysis under control of its regulatory authorities .It is a major leverage in the regulatory regime of the monetary authorities being altered as deem fit to ensure regulatory and institutional sanity, soundness, efficiency and safety of the macroeconomic or financial system at large . In this regard ,the primary responsibility of the banking regulators is basically systemic distress prevention for the purpose of macroeconomic and price stability in an economy .This is necessary in an attempt to safeguard against the hurdles of Bank panic ,Bank runs and Bank distress that can trigger total collapse of the nation’s banking industry and its credit payment system.
Therefore the prudent management of assets and liabilities and the ability of BANKS to guarantee the safety of depositors funds ought to constitute the paramount objectives of the deposit money banks as they go about the performance of their banking activities and the statutory role of financial intermediation .As a vital public resource for the maintenance and sustenance of Banking confidence, it must not be impugned, as regulators avoid regulatory arbitraging and ensure institutional compliance with the stringent provision s guiding Banking activities. Or that Banks play by the rules .The maintenance of this confidence –a scarce resource is required for the health and wealth of the nation’s financial system. The moment the confidence crashes our financial system also automatically crashes .Banks ‘failure and insolvencies worldwide based on historical review had been strategically linked to such confidence fiasco and with it the bedrock of the nation’s Banks .
Sometimes ,confidence impairment can disrupt efficient functioning of the financial system especially in a volatile highly underdeveloped financial market.Since Banks are the conduit and the catalysts through which monetary policies are communicated via the transmission mechanism onward to the broader economy ,macroeconomic instability and financial contagion can destabilize the entire system.Banks failure can impair the health of the system .Consequently the attainment of price stability can become an elusive nightmare as the ultimate goal of bank regulators is defeated in an unpredictable financial system .
In the words of James Akpan Adams to quote verbatim’ ’the insolvency of a bank has far more reaching consequences on the economy than mere losses to the shareholders and creditors of the Bank .Bank distress and failures has serious adverse effects on economic development .For instance , large scale Bank failures limit the ability of banks to create money ,jeopardized the payment mechanism and disrupt lending activities’’.
UNDERSTANDING THE CO