Causes of financial crises
Humankind has been confronted with financial crises for a long time and, apparently, will be confronted for a long time. Each crisis is investigated retrospectively, as a result of which they single out the reasons that entailed it. Most of the reasons describe qualitatively, without quantitative parameters or indicators, which often leaves room for disputes regarding the degree of significance of a particular reason. Under the conditions of such a polemic, acquaintance with the most popular reasons is at least interesting.
Recall that the financial crisis is considered a situation in which financial institutions or assets (for example, stocks or bonds) sharply lose a significant part of their value. The causes of crises include the following events:
Many scientists note: the psychology of most investors is designed so that in the absence of qualitative information about the future, they tend to imitate other investors.
')
Such imitation leads to banking crises. Without having reliable information about the status of a bank, depositors can immediately start withdrawing deposits, based only on rumors about possible problems of the bank or simply seeing a line of depositors lined up. Interestingly, such an avalanche influx of depositors and becomes the reason why the bank is not able to pay all at once. In other words, this is a self-fulfilling prediction: rumors and assumptions about bank problems alone lead to very real difficulties.
Imitation in actions can lead to banking and currency crises, speculative bubbles, as well as liquidity crises.
Under the financial leverage imply financing investments through loans. This is a situation where investors use not only their own funds, but also borrowed funds for investments. It is clear that if successful, the profit from leverage increases, but if the investment does not meet expectations, then the losses will be higher: the bankrupt investor will lose not only his money, but will owe the creditors, which will jeopardize the lenders themselves.
In itself, leverage is not the cause of financial crises, but it increases the risk and, consequently, aggravates the state of affairs in case of problems. Some economists point out that before crises, leverage is increasing. Thus, the number of loans to finance investment rose before the collapse of the bubble on Wall Street in 1929.
Many crisis researchers have noted that the erroneous behavior of people when dealing with new, untested phenomena is an important cause of financial turmoil. The historian Charles Kindleberger noted that many financial crises occur soon after the emergence of new technologies or new financial instruments (for example, new types of bonds).
While the prospects for new technologies or financial instruments can only be estimated theoretically, the future revenues from these technologies or instruments may look unnecessarily optimistic. Mass optimism leads to higher prices, but when reality does not meet expectations - prices are sharply adjusted downwards, i.e. a financial crisis occurs.
It is believed that errors in assessing the prospects for new technologies caused the dot-com crisis in 2001, and the incorrect assessment of the risks of financial instruments related to mortgage loans was one of the reasons for the 2008 global financial crisis.
It is believed that the inadequate regulation of the activities of financial organizations leads to the fact that these organizations can take excessive risks that can not be justified. The absence of laws restricting such behavior can simultaneously cause difficulties for many companies, which can cause a financial crisis.
Curiously, some economists believe that over-regulation can be the cause of crises: the US legislation has recently been criticized, according to which banks have to increase their own capital while taking greater risk, which can exacerbate the situation due to the contraction of lending.
Many financial institutions themselves may be on the verge of bankruptcy and endanger partners due to fraud. So, besides financial pyramids or Ponzi games, in which a financial company simply finances some debts by means of new loans, there are situations where it may be beneficial for the management of a company to hide the true state of affairs. Such "secrets" temporarily delay bankruptcy, but often aggravate it.
History offers many examples of such fraud. Let us recall the well-known scandal with the oil company Shell, when in 2004 it turned out that the company's proven oil reserves were exaggerated - and this error in reporting was a result of bad faith management. As a result of the scandal, the shares of a company that was considered one of the most reliable in the world lost sharply in value.
The concept of infection in the world of investment and finance describes the phenomena when a financial crisis can be transferred from one organization to another or even from one country to another. So, when an influx of depositors into one bank leads to distrust towards other banks (either a currency crisis or a government default leads to other crises within the country and even abroad) - they say that the spread of financial infection is manifested.
The phenomenon of financial infection arises due to the close financial interconnection of companies in a developed economy: for example, companies lend to each other, and these loans in turn become pledges for new ones. When someone in the system suddenly turns out to be unable to pay - all participants, as if by a chain, start having problems.
It is clear that financial infection itself is more likely a mechanism by which the problems of individual organizations turn into financial crises that already affect the entire economy.
Considering the concept of crisis in the economy, we compared the crisis with the aggravation of the disease of the economic system. You can look for the causes of the exacerbation itself, along with the causes of the disease. Some will be the prerequisites of others, and vice versa. Among the reasons listed above, there are both causes of illness (imitation in strategies, fraud, new technologies and uncertainty, regulatory errors and mismatch of assets to liabilities), as well as causes of exacerbations (leverage, financial infection).
Economists cite various causes of a particular financial crisis. Often, reasons are described on a qualitative level and several of them are attributed to each crisis at once. Among the most common causes of financial crises are imitation in strategies, financial leverage, new technologies and uncertainty, regulatory errors, fraud and dishonesty, as well as financial infection.
In Russia in 1998, as a result of low prices on commodity markets and a shortage of funds from tax revenues, the state budget deficit was financed with the help of bonds (state short-term bonds - government short-term bonds). In anticipation of a rise in prices for resources, the state calculated on the old bonds of T-bills by issuing new ones, which eventually began to resemble a financial pyramid.
Due to the high interest rates on T-bills and the fact that no additional revenues were found for the budget, the T-bills pyramid ended on August 17, 1998 with a state default (recognition by the government of the inability to pay debts).
It turns out that due to the presence of a financial pyramid, one can speak of “fraud and dishonesty”. However, not everything is so simple: if in the case of a separate company the pyramid can be hiding, then in the situation with T-bills it was known that payments were made by issuing new T-bills. This indicates that investors, buying T-bills, believed that additional funds for financing the Russian budget would be found. Thus, no less important reasons for the 1998 crisis were imitation in strategies and herd behavior.
It is curious that the sovereign default of August 17, 1998 through the mechanism of spreading financial infection led to an increase in pressure on the exchange rate, which in turn ended in a currency crisis: the ruble exchange rate decreased by 3 times in just 3 weeks.
flime.ru
Causes of financial crises
Recall that the financial crisis is considered a situation in which financial institutions or assets (for example, stocks or bonds) sharply lose a significant part of their value. The causes of crises include the following events:
Similarity of strategies and self-fulfilling predictions
Many scientists note: the psychology of most investors is designed so that in the absence of qualitative information about the future, they tend to imitate other investors.
')
Such imitation leads to banking crises. Without having reliable information about the status of a bank, depositors can immediately start withdrawing deposits, based only on rumors about possible problems of the bank or simply seeing a line of depositors lined up. Interestingly, such an avalanche influx of depositors and becomes the reason why the bank is not able to pay all at once. In other words, this is a self-fulfilling prediction: rumors and assumptions about bank problems alone lead to very real difficulties.
Imitation in actions can lead to banking and currency crises, speculative bubbles, as well as liquidity crises.
Financial leverage or leverage
Under the financial leverage imply financing investments through loans. This is a situation where investors use not only their own funds, but also borrowed funds for investments. It is clear that if successful, the profit from leverage increases, but if the investment does not meet expectations, then the losses will be higher: the bankrupt investor will lose not only his money, but will owe the creditors, which will jeopardize the lenders themselves.
In itself, leverage is not the cause of financial crises, but it increases the risk and, consequently, aggravates the state of affairs in case of problems. Some economists point out that before crises, leverage is increasing. Thus, the number of loans to finance investment rose before the collapse of the bubble on Wall Street in 1929.
New technologies, uncertainty and herd behavior
Many crisis researchers have noted that the erroneous behavior of people when dealing with new, untested phenomena is an important cause of financial turmoil. The historian Charles Kindleberger noted that many financial crises occur soon after the emergence of new technologies or new financial instruments (for example, new types of bonds).
While the prospects for new technologies or financial instruments can only be estimated theoretically, the future revenues from these technologies or instruments may look unnecessarily optimistic. Mass optimism leads to higher prices, but when reality does not meet expectations - prices are sharply adjusted downwards, i.e. a financial crisis occurs.
It is believed that errors in assessing the prospects for new technologies caused the dot-com crisis in 2001, and the incorrect assessment of the risks of financial instruments related to mortgage loans was one of the reasons for the 2008 global financial crisis.
Regulation errors
It is believed that the inadequate regulation of the activities of financial organizations leads to the fact that these organizations can take excessive risks that can not be justified. The absence of laws restricting such behavior can simultaneously cause difficulties for many companies, which can cause a financial crisis.
Curiously, some economists believe that over-regulation can be the cause of crises: the US legislation has recently been criticized, according to which banks have to increase their own capital while taking greater risk, which can exacerbate the situation due to the contraction of lending.
Fraud and bad faith
Many financial institutions themselves may be on the verge of bankruptcy and endanger partners due to fraud. So, besides financial pyramids or Ponzi games, in which a financial company simply finances some debts by means of new loans, there are situations where it may be beneficial for the management of a company to hide the true state of affairs. Such "secrets" temporarily delay bankruptcy, but often aggravate it.
History offers many examples of such fraud. Let us recall the well-known scandal with the oil company Shell, when in 2004 it turned out that the company's proven oil reserves were exaggerated - and this error in reporting was a result of bad faith management. As a result of the scandal, the shares of a company that was considered one of the most reliable in the world lost sharply in value.
Financial infection
The concept of infection in the world of investment and finance describes the phenomena when a financial crisis can be transferred from one organization to another or even from one country to another. So, when an influx of depositors into one bank leads to distrust towards other banks (either a currency crisis or a government default leads to other crises within the country and even abroad) - they say that the spread of financial infection is manifested.
The phenomenon of financial infection arises due to the close financial interconnection of companies in a developed economy: for example, companies lend to each other, and these loans in turn become pledges for new ones. When someone in the system suddenly turns out to be unable to pay - all participants, as if by a chain, start having problems.
It is clear that financial infection itself is more likely a mechanism by which the problems of individual organizations turn into financial crises that already affect the entire economy.
Causes and causes of causes
Considering the concept of crisis in the economy, we compared the crisis with the aggravation of the disease of the economic system. You can look for the causes of the exacerbation itself, along with the causes of the disease. Some will be the prerequisites of others, and vice versa. Among the reasons listed above, there are both causes of illness (imitation in strategies, fraud, new technologies and uncertainty, regulatory errors and mismatch of assets to liabilities), as well as causes of exacerbations (leverage, financial infection).
Summary
Economists cite various causes of a particular financial crisis. Often, reasons are described on a qualitative level and several of them are attributed to each crisis at once. Among the most common causes of financial crises are imitation in strategies, financial leverage, new technologies and uncertainty, regulatory errors, fraud and dishonesty, as well as financial infection.
For a starter: the financial crisis in Russia in 1998
In Russia in 1998, as a result of low prices on commodity markets and a shortage of funds from tax revenues, the state budget deficit was financed with the help of bonds (state short-term bonds - government short-term bonds). In anticipation of a rise in prices for resources, the state calculated on the old bonds of T-bills by issuing new ones, which eventually began to resemble a financial pyramid.
Due to the high interest rates on T-bills and the fact that no additional revenues were found for the budget, the T-bills pyramid ended on August 17, 1998 with a state default (recognition by the government of the inability to pay debts).
It turns out that due to the presence of a financial pyramid, one can speak of “fraud and dishonesty”. However, not everything is so simple: if in the case of a separate company the pyramid can be hiding, then in the situation with T-bills it was known that payments were made by issuing new T-bills. This indicates that investors, buying T-bills, believed that additional funds for financing the Russian budget would be found. Thus, no less important reasons for the 1998 crisis were imitation in strategies and herd behavior.
It is curious that the sovereign default of August 17, 1998 through the mechanism of spreading financial infection led to an increase in pressure on the exchange rate, which in turn ended in a currency crisis: the ruble exchange rate decreased by 3 times in just 3 weeks.
A source
flime.ru
Source: https://habr.com/ru/post/75071/
All Articles