Stock markets can be as flexible and risky to trade in and in 1987 this became a reality when “Dow Jones Industrial Average index of shares in leading US companies dropped 22% and European and Japanese markets followed suit” (Schifferes, 2007). As the public’s confidence in the value of the dollar deteriorated, surrounding countries such as German made core decisions that enhanced the value image of their currency.
This added to the lessening of the dollar value image and stock sells in the US went up due to automation of the sale process. “It is, however, the responsibility of the Federal Reserve, and all central banks, to make sure very bad things do not happen; protecting the public from adverse consequences of financial turmoil and reducing the volatility in the economy as a whole. That is, something exactly analogous to fire insurance” (Felton & Reinhart, 2008, p. 34).
These economic shocks, felt as wide as the UK as interest rates went low there too, threatening to spillover to other economy sectors and countries led to the lowering of interest rates, by the Fed and other core banks, that led to the occasional suspension of stock trading to, hopefully, lower the impact of the financial crisis. Effects of the low interest rates, triggered deterioration of pound value in the UK and spilled over to the housing sector showing that interconnections between economies could not be ignored.
1998 was one of the years that were not spared either by the crises reoccurrence. The year was marked with the failure of the Long-Term Capital Market (LTCM) as a spillage of the financial crisis that started in Asia and spread to Brazil and Russia. In his financial analysis, Schifferes (2007) revealed that; LTCM was a hedge fund set up by Nobel Prize winners Myron Scholes and Robert Merton to trade bonds.
But when Russia defaulted on its government bonds in August 1998, investors fled from other government paper to the safe haven of US Treasury bonds, and interest rate differences between bonds increased sharply. LTCM, which had borrowed a lot of money from other companies, stood to lose billions of dollars – and in order to liquidate its positions it would have to sell Treasury bonds, plunging the US credit markets into turmoil and forcing up interest rates.
In one of the most severe cases of lack of pro-activeness in system risk regulation, after the failure of LTCM, the economy would be plunged into a financial crisis. When internet based companies such as Amazon and America Online (commonly known as AOL) and entered the stock market, and listed with NASDAQ, the two companies shares market seemed to boom, however, early 2000 there was marked deterioration in the NASDAQ technology index listing at NASDAQ setting the downward trend for the companies’ shares.
At the same time, the 9/11 attacked fueled the downfall in the financials due to the temporary closure of trading in the stock market. To stimulate the recovery process, the US Federal Reserve Bank and Central Bank sough to lower the interest rates. The task of finding the real cause of the current crisis began right on outset of financial failures. Authors, such as Diebold & Santomero (1999), observe and indicate that;
“…small businessmen and the local citizenry caused the crisis through significant and consistent withdrawals from the national currency. In the end, a lack of confidence led to currency flight. Indeed, confidence was not warranted. In the aftermath, the state of the financial sectors in Thailand, Indonesia, and Malaysia (not to mention Russia or Mexico) clearly indicated that these financial systems were on the verge of collapse. Rational locals left at a propitious time” (p. 4-5).