History of Financial Crisis
Major triggers in the economic crisis as noted to have started in the late 1990s. Historically, most notable financial crises may have causes a great setback to the economy yet the economy regulators did not see to arrest the underlying causes. This in the end caused occurrence and re-occurrence of financial crisis after financial crisis – the current crisis being the latest. Future attempts to ensure a similar occurrence does not occur or have similar severity than the current crisis, may need a deep analysis of the past crises and the underlying causes.
Policy implementers will then ensure policies put in place have the ability to root out the causes and triggers of financial crises. Past measures to prevent spillage of financial failure in one bank or financial institution to another have proven unsuccessful as financial crises, though having been experienced since the 1800s, is still a real threat to the current economy. Major trigger of financial failure seem to be alienated to the credit lending and debt defaulters. From countries to individual financial firms, debt defaulting seems to know no boundaries on which firm it picks.
From England to Asia, Russia to the Sub-Sahara, interconnections and lending trends seems to weaken policies drafted and implemented to reveal a financial crisis and prevent an economic collapse. Financial crises can be traced as back as 1860 and 1890s when a major bank in London, Overend and Gurney, declared that it had gone bankrupt and collapsed in 1866. Having been he major lender to commercial and retail banks at the time, the smaller banks it lent to that depended on the money from Overend and Gurney also collapsed. This may have been the trigger of a trail of financial crises that have hampered the economy since the 1800s.
Having learnt from this and in an effort to prevent a similar spillover of a financial failure in one financial institution to another, economy reformers set a policy that Overend and Gurney would only lend money to banks only in the event of a crisis and only if that would be the only option. This policy was then implemented when Barings, made losses from investments it had made in Argentina. To prevent spillover of the Barings financial failure and a possible system crisis, the losses it made in the Argentina investment were absorbed by the Bank of England.
Nevertheless, this did not prevent other financial failures and crises from occurring in the 1900s. Financial Crisis in the 1900s The famous Great Depression in the 1930s was partly contributed to by the collapse of Wall Street that triggered a tail of financials failures in 1929, and the World War 1 that “made it harder for people, goods, and money to move around the globe and it shifted the direction in which they flowed, too” (Rauchway, 2008). Deteriorating stocks triggered the financial failure famously dubbed “The Great Depression” and took companies decades to recover and regain upto their initial financial status.
The severity of this financial crisis is to be felt to this day for many companies that did not manage to recover from the crisis. Differing but at the same time complimenting information has been unveiled about the Great Depression. According to some researchers, “the Great Depression was unleashed by a collapse of production and consumption, amplified by a drastic reduction in the supply of bank credit which came about largely because the Fed failed to act as a lender of last resort” (Felton & Reinhart, 2008, p.
37). As a recovery measure, the New Deal – a collection of policies – was then introduced with the hope of implementing working policies to ensure success of the recovery process. The recovery process initiated under the New Deal was aimed at economy sensitive areas such as housing, employment, poverty e. t. c. In 1985, small financial firms in the savings and loans (S&L) sector, in their bid engaged in “tight” with the bigger firms as they handled those depositors who aimed at retail investment.
When the small firms collapsed, the US government suffered major losses as it has offered insurance against the retail investments. In order for the liability incurred from the retail deposits insurances, Resolution Trust Company was set up by the US government to take charge of and trade off all assets owned by the savings and loans financial firms. In the end though this may have worked against the small firms that collapsed, it was an added advantage to the bigger financial institutions as the looming competition was now out of the way.