Dr. Mohamed Eskandar Shah Mohd Rasid

Deputy Dean of Graduate Studies - INCIEF

Financial Crises

Hotlist of Crises

PANIC OF 1907, A U.S. ECONOMIC

RECESSION WITH BANK FAILURE

PANIC OF 1907, A U.S. ECONOMIC

RECESSION WITH BANK FAILURE

Wall Street Crash of 1929 - Black Tuesday and

Great Depression 1929 - 1945

Wall Street Crash of 1929 - Black Tuesday

and Great Depression of 1930 - 1945

Black Monday (1987)The largest one-day percentage decline in stock market

history

Black Monday (1987)The largest one-day percentage decline in stock market

history

1997 – 98 Asian Financial Crisis

1997 – 98 Asian Financial Crisis

THE PANIC OF

1907Bankers' Panic or Knickerbocker Crisis

attempt to corner the

market on stock of the

United Copper

Company

October 1907

by

Heinze, Moors, Otto & Barney

Fall Effects

Sto

ck

Ex

ch

an

ge

50

%

Pro

du

ctio

n 1

1%

Imp

orts

26%

Un

em

plo

ym

en

t 8%

Later to the downfall of the

Knickerbocker Trust CompanyNew York City's third-largest trust.

who pledged large sums of his own

money, and convinced other

New York bankers to do the same,

to shore up the banking system

J. P. Morgan

Some believed Engineered Panic

Others believed Morgan took advantage of

the panic to allow his U.S. Steel company to

acquire TC&I.

Despite Morgan’s role was significant, but still

he lost $21M, & lots of Criticism & Scrutiny

Black Tuesday & Great Depression

1929 - 1945

Originated in the U.S., after the fall in stock prices

that began around September 4, 1929, and became

worldwide news with the stock market crash of

October 29, 1929 (known as Black Tuesday)

United

StatesGreat Britain France Germany

Industrial

production–46% –23% –24% –41%

Wholesale

prices–32% –33% –34% –29%

Foreign trade –70% –60% –54% –61%

Unemployment +607% +129% +214% +232%

Keynesian Equilibrium

Great Depression was mainly caused by monetary contraction, the consequence of poor policy-making by the American Federal Reserve System and continued crisis in the banking system

Monetarists, including Milton

Friedman, argue

Irving Fisher, argued

the predominant factor

leading to the Great

Depression was over-

indebtedness and

deflation

Paradoxically, the more the debtors paid, the

more they owed.

Decline in productivity

the decline in productivity that caused the initial

decline in output and a prolonged recovery due to policies that affected the

labour market

Kehoe

& Prescott

Breakdown of

International

Trade

the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign

trade

the unequal distribution of wealth throughout the 1920s caused the Great Depression

Inequality

Economy Produced more, consumed less due to less income by masses;

Abandoning the Gold Standard

WW II – Industrial Revolution &

Employment Opportunities

Black Monday (1987)

The largest one-day percentage decline in stock market history

Black Monday refers to Monday, October 19, 1987,

when stock markets around the world crashed,

shedding a huge value in a very short time.

Market Falls

45.50%

Hong Kong

26.5%

UK

41.8%Australia

31%

Spain22.8%

USA

60%New Zealand

Program Trading

Illiquidity

Overvaluations

1997 Asian Financial Crisis

Thailand Economic Bubble &

Hot Money

Fixed Exchange Rates

Foreign Exchange Risk

Increase in Interest Rate in US

This made US more attractive market for Investment, compared

to, in pegged Asian currencies While US made it much more

attractive for HOT MONEY

Highly Leveraged Societies

Solution

ECONOMIC REFORMS

Asian Crises & Malaysia

Pre-Crisis Malaysia

The KLSE Composite index was above 1,200

Before the crisis, Malaysia had a large

current account deficit of 5% of its GDP

The ringgit was trading above 2.50 to the dollar

The overnight rate was below 7%

Crisis Effects on Malaysia

The KLSE Composite index declined to 600

The ringgit went to 4.57 to the dollar

The overnight rate jumped to 40% from 7%

Ringgit – Dollar Pegging