Spooky Financial Crisis Stories on Halloween!
Happy Halloween, everyone!
Just because it is Halloween today, it is time for some scary financial crisis stories from the history of the world.
1. The Panic of 1873
The panic of 1873 was a financial crisis that caused a depression in Europe and North America that lasted for several years. It was caused by over-expansion and speculation in the stock market, as well as a series of bank failures. The panic led to a decrease in demand for goods, which led to layoffs and a decrease in production. This, in turn, led to even more bank failures and increased the number of people out of work. The panic of 1873was one of the worst economic crises of the 19th century.
The panic of 1873 began on September 18, when the New YorkStock Exchange closed for 10 days due to a lack of stock buyers. This event triggered a domino effect across the globe as investors began to sell off their stocks and commodities. Banks failed, businesses closed their doors, and millions of people were left unemployed. The United States was particularly hard hit by the panic, as its economy relied heavily on credit at the time.
2. The Panic of 1893
The Panic of 1893 was a severe economic depression in theUnited States that began in 1893 and ended in 1897. It began in February of that year when the Philadelphia and Reading Railroad Company went bankrupt. It deeply affected every sector of the economy, especially agriculture and silver mining. This triggered a series of bank failures across the country, and by the end of the year, the stock market had lost nearly half its value. The panic had wide-ranging effects, including the closure of 600 banks and 60,000 businesses. The unemployment rate rose to 20%.
The Panic of 1893 was caused by many factors, including the following:
· Over production and falling prices in the agricultural sector
· A sharp decline in silver prices after the Sherman Silver Purchase Act was repealed in 1893. At the time, silver was being used as currency alongside gold. However, when silver prices began to decline, people started selling off their silver holdings, which led to even more instability in the markets.
· The failure of several major New York City banks
· An increase in foreign competition, particularly from Germany
· The end of railroad land grants, which had been a major source of revenue for railroads
· Over-speculation in the stock market
3. The Panic of 1907
On October 19th, 1907 the stock market crashed. The panic of1907 was caused by a perfect storm of economic conditions. The year 1907 was a volatile time for the stock market.
Several factors contributed to the panic of 1907.
· One factor was the San Francisco earthquake. The earthquake caused much damage, and many people lost their homes and businesses.This led to a loss of confidence in the stock market, and many people started selling their stocks.
· Another factor that contributed to the panic of 1907 was an economic recession. The recession caused many businesses to fail and many people to lose their jobs. This also led to a loss of confidence in the stock market, and more people started selling their stocks.
· The third factor that contributed to the panic of 1907 was a run on the banks. A run on the banks happens when a lot of people withdraw their money from the bank at the same time because they think the bank is going to fail. This can cause the bank actually to fail, and it can also lead to more panic in the stock market.
All of these factors led to a stock market crash. The panic of 1907 led to the creation of the Federal Reserve. The Federal Reserve is the US central bank. It was created to stabilize the economy and prevent future financial crises.
4. The Great Depression of 1929
The stock market crash of 1929 was a four-day sell-off that began on October 24, 1929. It was the worst stock market crash in the history of the United States, and it signaled the beginning of the Great Depression.
Several factors contributed to the crash.
· The New York Stock Exchange Began to Overheat: In the 1920s, the stock market underwent a period of rapid growth. Stocks became more accessible to the average person as new investment opportunities arose and banks began offering loans for stock purchases. This led to a speculative bubble—when prices are driven up by demand but are not supported by underlying fundamentals—that eventually burst.
· The Federal Reserve Raised Interest Rates: To cool down the overheating economy, the Federal Reserve raised interest rates in 1928 and again in early 1929. This made it more expensive for companies to borrow money and slowed economic growth.
· There was an increase in Margin Trading: Margin trading is when investors borrow money from a broker to purchase stocks. In 1929, brokers were lending investors up to 90% of the purchase price, which meant that investors only had to come up with 10% of the total cost. This increased risk-taking and speculation, which led to even more volatility in the markets.
· Negative Headlines Began to Circulate: As economic conditions worsened, negative headlines about company earnings and the overall state of the economy began to circulate. This further eroded investor confidence and led to more selling as panic set in.
All these factors came to a head on October 24th, when the selling began in earnest on the New York Stock Exchange. Prices continued to fall over the next four days, culminating in what is now known as Black Thursday—the worst day in stock market history.
5. The oil crisis 1973-74
The oil crises of 1973-74 are an important part of history. These crises were a major factor in the development of the modern oil market, and their effects are still felt today.
The First Crisis: October 1973
The first oil crisis began on October 6, 1973, when Egypt and Syria attacked Israel to retake the Sinai Peninsula, which had been captured by Israel in the 1967 Six-Day War. The Arab members of theOrganization of Petroleum Exporting Countries (OPEC) then imposed an oil embargo on the United States and other countries that had supported Israel in the war that came to be known as Yom Kippur War. As a result of the embargo, oil prices quadrupled from $3 per barrel in early 1973 to more than $12 per barrel by late 1974. The price increases caused widespread economic disruption, with inflation rising sharply and output growth slowing in many countries. In the United States, for example, inflation rose from 4.8% in 1972 to 11.0% in1974.
The Second Crisis: January 1974
The second oil crisis began in January 1974 when OPEC announced another round of price increases. This time, prices tripled from $5per barrel to nearly $20 per barrel by December 1974. The price increases caused even more economic disruption than the first crisis, with inflation rising to double digits in many countries.
In response to the second crisis, many Western countries began developing alternative energy sources, such as nuclear power. They also implemented energy conservation measures, such as gas rationing. As a result of these efforts, OPEC's share of global oil production declined from 50% in 1974to 40% by 1980.
6. The 1987 Stock Market Crash
On October 19, 1987, the stock market crashed. It was the biggest one-day percentage drop in stock market history. The Dow JonesIndustrial Average fell by 22.6%, losing 508 points. In total, $1.2 trillion dollars were wiped out in value.
Experts point to a variety of reasons for the 1987 stock market crash. These include:
· High interest rates: In order to combat inflation, the Federal Reserve raised interest rates to historic levels in the early 1980s. This made it more expensive for companies to borrow money and invest in new projects, which led to slower economic growth. At the same time, high interest rates made it more attractive for investors to put their money into bonds rather than stocks.
· A strong dollar: A strong dollar makes U.S.exports more expensive and, therefore less competitive in global markets. This can lead to slower economic growth and job losses. In the months leading up to the 1987 crash, the dollar had reached its highest level against other major currencies in more than five years.
· Computer program trading: Computer program trading is a type of trading that uses computer algorithms to make buy or sell decisions on behalf of investors. This type of trading can amplify stock market swings because it allows large amounts of money to be moved in and out of the market very quickly. It’s estimated that computer program trading accounted for about 20% of all stock trades on October 19, 1987.
· Another theory is that portfolio insurance played a role. Portfolio insurance is a type of hedging strategy that uses derivatives to protect against losses in a portfolio. As stocks fell on October19, 1987, portfolio insurers sold even more stocks to hedge their positions, which likely contributed to the magnitude of the sell-off.
7. The Japanese Asset Price Bubble Burst of 1992
The Japanese asset price crisis was a time of great economic turmoil for Japan. It began in the early 1990s and lasted for over a decade, known as the Lost Decade. During this time, asset prices in the country fell sharply, leading to a decrease in economic activity and an increase in unemployment.
There are a number of factors that are thought to have contributed to the Japanese asset price crisis.
· First, there was a sharp increase in the amount of debt that companies and households were taking on. This led to a situation where many firms and individuals were highly leveraged, and thus more vulnerable to changes in asset prices.
· Second, there was a large increase in the price of land and other assets during the 1980s. This was partly due to easy credit conditions and low interest rates. As prices continued to rise, many people began to believe that these assets would always go up in value. This created a situation known as "asset bubbles," where prices become disconnected from underlying fundamentals.
· Third, the Japanese stock market crashed in1989. This had a ripple effect throughout the economy, as many firms and individuals saw their wealth decline sharply. The stock market crash led to a decrease in confidence, which further contributed to the decline in asset prices.
· Fourth, there was a sharp appreciation of theJapanese yen during the 1980s. This made Japanese exports more expensive and less competitive relative to other countries. As a result, many firms began to experience declining profits, which put downward pressure on asset prices.
· Finally, there were a number of structural problems within the Japanese economy that made it more susceptible to an asset price decline. For example, banks had significant holdings of shares in other companies, which made them more vulnerable to declines in stock prices. In addition, many firms had relationships with other firms that they relied on for financing, which made them more vulnerable to changes in credit conditions.
During this time, Japan's stock market and real estate values fell sharply, while its government debt ballooned. The decline in asset prices led to a decrease in economic activity and an increase in unemployment. Many people lost their jobs and their homes during this time period, making it one of the most difficult times in recent history for the people of Japan.
8. The Asian Financial Crisis of 1997
The Asian financial crisis was a period of economic turmoil that began with the collapse of the Thai baht in July 1997. The crisis spread throughout East Asia and eventually led to the bankruptcy of several large banks and financial institutions in Thailand, South Korea, and Indonesia.
The Origins of the Crisis
The Asian financial crisis had its roots in a number of factors, including over-investment, excessive borrowing, and currency speculation. In Thailand, for example, many banks and businesses had taken out loans in U.S. dollars, betting that the Thai baht would continue to appreciate against the greenback.
When the Thai baht suddenly collapsed in July 1997, these dollar-denominated loans became much more expensive to repay. This put immense pressure on Thai banks and businesses, many of which were forced to declare bankruptcy. The knock-on effect was felt throughout the region as other currencies came under attack from speculators betting on further falls.
The Spread of the Crisis
The crisis quickly spread beyond Thailand's borders as speculators attacked the currencies of Malaysia, Indonesia, South Korea, and Taiwan. In South Korea, for example, the value of the won fell by more than 50 percent against the U.S. dollar between July 1997and December 1998. This made it extremely difficult for Korean companies to service their dollar-denominated debts, putting immense pressure on the country's banking system.
In Indonesia, meanwhile, years of economic mismanagement by President Suharto came home to roost as the crisis unfolded. Suharto had built up a huge network of cronies who had benefited from state contracts and loans financed by foreign capital inflows. When those capital flows dried up in the wake of the crisis, Suharto's cronies were left holding worthless assets and massive debts. This added to the pressure onIndonesia's banking system and helped trigger a full-blown economic collapse that culminated in Suharto's resignation in May 1998.
The Aftermath of the Crisis
While the 1997 Asian financial crisis was devastating for many countries in the region, it also presented an opportunity for reform. In the years following the crisis, many economies in Southeast Asia implemented sweeping reforms to their financial systems. These reforms helped to reduce vulnerability to future crises and laid the foundation for strong economic growth in the years to come.
9. The Dot-Com Bubble Burst of 2000
The dot-com bubble was a time of exuberance and speculation in the tech industry that came to an abrupt end in 2000. During the 1990s, many internet-based companies were founded with the goal of becoming the dominant player in their respective markets. These companies raised billions of dollars in initial public offerings and venture capital, and their valuations soared.
However, the dot-com bubble burst when it became clear that many of these companies were overvalued and not generating enough revenue to justify their valuations. This led to a sharp sell-off in technology stocks, and the NASDAQ Composite Index, which is heavily weighted towards tech stocks, fell by 78% from its peak in 2000. The dot-com bubble burst had a ripple effect throughout the economy, and it is often cited as one of the contributing factors to the 2001 recession.
10. 2001 Argentine Economic Crisis
The 2001 Argentine economic crisis was a major financial crisis in Argentina. The country had been experiencing an economic boom in the late 1990s due to high levels of foreign investment, but this came to an abrupt end in 2001. The crisis led to a sharp decrease in GDP, as well as high levels of unemployment and poverty.
There are several factors that contributed to the crisis, including:
· Over-reliance on foreign capital: In the years leading up to the crisis, Argentina had been borrowing heavily from abroad to finance its budget deficit. This made the country very vulnerable to changes in global financial conditions.
· Faulty economic policies: The Argentine government pursued a number of flawed economic policies in the 1990s, including fixing the exchange rate between the Argentine peso and the US dollar. This led to a build-up of debt and made the economy uncompetitive.
· Corruption and mismanagement: Corruption was rampant in Argentina in the 1990s, and this played a role in exacerbating the crisis. For example, government officials were often paid kickbacks in exchange for awarding contracts to favored companies.
The crisis had a devastating impact on Argentina, with GDP falling by 10% in 2001 and unemployment reaching 24%. Poverty also rose sharply, with over half of Argentines living below the poverty line by 2002.The crisis also led to political instability, with three presidents being ousted from office within two weeks in December 2001.
11. The 2008 Financial Crisis
The 2008 financial crisis is the worst economic disaster since the Great Depression of 1929. It occurred despite Federal Reserve andTreasury Department efforts to prevent it. The primary cause is the Subprime Mortgage Crisis.
The subprime mortgage crisis was caused by a combination of factors: lenders loosening borrowing standards, borrowers taking on more debt than they could afford, and Wall Street creating new financial products that bundled and sold mortgages.
Lenders began to loosen their borrowing standards in the early 2000s. They did this by offering “subprime” loans to borrowers with poor credit histories. In addition, they began offering “Alt-A” loans to borrowers who didn’t have to document their income or assets. And they offered “optionARMs,” which allowed borrowers to choose how much interest they wanted to pay each month, with the unpaid interest added to the loan balance.
Borrowers took on more debt than they could afford by buying homes they couldn’t afford and by taking out home equity loans and lines of credit. In addition, many borrowers who could have afforded their monthly mortgage payments still defaulted because they owed more than their homes were worth. This is called being “underwater” on your mortgage.
Wall Street played a role in causing the subprime mortgage crisis by creating new financial products that bundled and sold mortgages. These products, known as collateralized debt obligations (CDOs), were rated AAA by rating agencies because they contained a mix of both good and bad mortgages.However, when housing prices began to decline in 2006, and it became clear that many of the mortgages in these CDOs were subprime. This caused the value of the CDOs to plummet and set off a chain reaction that led to the collapse of Lehman Brothers and Bear Stearns – two major investment banks.
The credit crunch was caused by a loss of confidence in the US subprime mortgage market. This loss of confidence led to a tightening of credit conditions, which made it harder for borrowers to get loans. The credit crunch also made it harder for banks to borrow money from each other. This is because banks became reluctant to lend money to each other when they weren’t sure if the borrower would be able to repay the loan. As a result, banks started hoarding cash, which made it even harder for businesses and consumers to get loans. This credit crunch led to the recession.
12. The 2011 European Debt Crisis
The 2011 European debt crisis was a multi-year debt crisis that affected several European countries. The crisis began in Greece in 2009 and spread to other countries, including Italy, Spain, Portugal, and Ireland.
The cause of the crisis was a combination of high government debt, low growth, and high interest rates. This combination made it difficult for countries to repay their debt and caused investors to lose confidence in the ability of these countries to repay their debt. As a result, these countries were forced to implement austerity measures, which led to protests and social unrest.
The crisis peaked in 2011 and has since begun to improve, although some countries are still struggling with high levels of debt. Below isa timeline of the major events of the 2011 European debt crisis.
2009: The Crisis Begins
The crisis began in Greece in 2009 when it was revealed that the country's budget deficit was much higher than previously thought. This led to concerns about Greece's ability to repay its debt, and investors began to lose confidence in Greek government bonds. As a result, Greece's borrowing costs rose sharply, making it even more difficult for the country to repay its debt.
2010: The Crisis Spreads
In 2010, the crisis spread to other countries, including Portugal, Spain, Italy, and Ireland. These countries also had high levels of government debt and low growth, which made it difficult for them to repay their debt. As investor confidence declined, these countries also experienced increased borrowing costs.
2011: The Crisis Peaks
The crisis peaked in 2011 as borrowing costs for some countries reached unsustainable levels. This led to concerns that these countries would default on their debt. To prevent this, the European Union (EU) and the International Monetary Fund (IMF) provided financial assistance to Greece, Portugal, Spain, and Ireland.
2012: The Crisis Begins to Improve
The crisis began to improve in 2012 as borrowing costs for most countries started to decline. This was due largely to the actions of the European Central Bank (ECB), which started buying government bonds to lower borrowing costs. By 2013, most countries had returned to economic growth and had begun reducing their budget deficits.
13. The 2015 Chinese Stock Market Crash
The 2015 Chinese stock market crash started on June 12th when the Shanghai Composite, the main index of the China Stock Exchange, reached its seven-year high of 5,178 points. The crash continued until August 26th, when the index fell below 3,500 points, a fall of 32%. This was followed by a mini-rally until October 8th where the index closed at 3,209 points, still down 27% from its peak.
June 12th - Shanghai Composite Reaches Seven-Year High
The 2015 Chinese stock market crash started on June 12th when the Shanghai Composite reached its seven-year high of 5,178 points. This was followed by a sell-off in the next two days as investors started to take profits.
July 6th - First Crash Circuit Breaker Triggered
The first crash circuit breaker was triggered on July 6th when the Shanghai Composite fell 7%. This circuit breaker suspended trading for 15 minutes. After trading resumed, the index fell another3% before recovering some ground to close down 5%.
August 24th - Second Crash Circuit Breaker Triggered
The second and final crash circuit breaker was triggered on August 24th when the Shanghai Composite fell 8%. This circuit breaker halted trading for the day. The next day, the index plunged 10%as selling accelerated.
August 26th - Shanghai Composite Falls Below 3,500 Points
The crash continued until August 26th, when the index fell below 3,500 points, a fall of 32%. This was followed by a mini-rally until October 8th, when the index closed at 3,209 points, still down 27% from its peak.
October 8th - Third Crash Circuit Breaker Triggered
On October 8th, a third crash circuit breaker was triggered when the Shenzhen Composite plunged 7%. This halted trading for 15 minutes. After trading resumed, the index recovered some ground to close down 4%.
There are a few theories as to what sparked the crash.
· Firstly, it's worth noting that the Chinese stock market had been on a tear in the months leading up to August 24th. Between June 2014 and June 2015, the Shanghai Composite Index more than doubled in value. This created a bubble, with investors bidding up prices to unsustainable levels. When bubbles form in any asset class—whether it's stocks, real estate, or art—they eventually pop. And that's exactly what happened in China. Investors began to cash out of their positions, leading to a sharp decline in stock prices.
· Another theory is that Chinese authorities were trying to slow down the economy by tightening credit conditions. This made it harder for companies to raise money by selling new shares, which put downward pressure on stock prices.
Whatever the cause, there's no doubt that the 2015 Chinese stock market crash had far-reaching consequences. It wiped out trillions of dollars of wealth and sent shockwaves through global financial markets.
14. The 2018 Turkish Currency Crisis
In early 2018, the Turkish currency crisis caused the value of the Turkish lira to plummet against the US dollar. The crisis led to widespread panic among investors, with many selling their Turkish assets and moving their money out of the country. This in turn led to further falls in the value of the lira, creating a vicious cycle that ultimately culminated in a full-blown currency crisis.
There are a number of reasons why the Turkish currencycrisis happened.
· Firstly, Turkey has been running a large trade deficit in recent years, meaning that it has been importing more goods and services than it has been exporting. This has put pressure on the country's foreign currency reserves, making it more difficult for the government to prop up the value of the lira.
· Secondly, Turkey has high levels of inflation, which have eroded confidence in the currency. Inflation reached an annual rate of 16% in September 2018, well above the central bank's target of 5%. This has made it difficult for businesses to plan ahead and has led to increased costs for consumers.
· Thirdly, there are concerns about Turkey's debt levels. The country's government debt is currently equivalent to around 35% of GDP, while its corporate debt is equivalent to around 100% of GDP. This high level of debt makes Turkey susceptible to a financial shock if investors lose confidence in the country's ability to repay its debts.
· Finally, tensions between the Turkish government and the central bank have also contributed to the crisis. In particular, there are concerns that President Recep Tayyip Erdogan is exerting too much influence over monetary policy. This has led to fears that the central bank may not be able to act independently to support the currency if necessary.
The crisis is also having an impact on other countries. For example, Turkey is a major market for Russian steel exports, so Russia could see its own economic growth slow as a result of lower demand from Turkey. Similarly, European banks have lent billions of euros to Turkish companies, so they could face losses if those companies default on their debts.
15. The 2020 Coronavirus Market Crash
The 2020 coronavirus market crash was a global stock market crash that occurred in response to the COVID-19 pandemic. The crash began onFebruary 20, 2020, and lasted until March 23, 2020. By the end of the crash, the Dow Jones Industrial Average had fallen by 34%, the S&P 500 had fallen by 38%, and the Nasdaq Composite had fallen by 41%.
A few of the key factors for this crash were:
· The first factor is the outbreak of COVID-19 itself. As the virus began to spread around the world, businesses began to shutter their doors and countries went into lockdown. This led to a decrease in demand for goods and services, which in turn led to layoffs and a decrease in consumer spending. All of this contributed to a decrease in economic activity, which worried investors and caused them to sell off their stocks.
· The second factor is oil prices. As demand for oil decreased due to the decrease in economic activity, oil prices fell sharply. This had a ripple effect on energy stocks, which make up a significant portion of many global stock indexes. When energy stocks fall, it drags down the whole index with it.
· The third factor is uncertainty. When there's a lot of uncertainty in the markets, investors tend to sell off their stocks and wait for things to stabilize before buying back in. And there was certainly a lot of uncertainty in the markets during the coronavirus market crash. No one knew how long the pandemic would last or how severe it would become. This led to widespread panic selling as investors tried to get out of the markets before they fell any further.
What We Can Learn From Past Financial Crises
These events have had a profound impact on the global economy. As we look to the future, we must understand the key lessons from these crises. Here are three of the most important takeaways.
1. Diversification is key.
One of the key lessons from past financial crises is the importance of diversification. We live in a connected financial world. Here impact in any part of the world on any particular asset class can cause global repercussions.Many investors who had put all their eggs in one basket were left holding worthless assets in many of these financial crises.
Diversifying your portfolio is one of the best ways to protect yourself from potential losses. By investing in a variety of asset classes, you can minimize your risk and maximize your chances of weathering any future storms.
2. Don't rely on debt.
Another key lesson from past financial crises is the dangers of excessive debt. Several of the financial crises were caused by institutions that collapsed because they were overexposed to debt. This led to a wave of far-reaching effects on economies, businesses, and individuals.
At an individual level, we've seen how dangerous excessive debt can be. That's why it's so important to live within your means and only borrow what you can afford to repay. If you're carrying too much debt, now is the time to start paying it down.
3. Be prepared for anything.
The final key lesson from past financial crises is that anything can happen. In 2008, few people could have predicted the collapse of a company of the stature of Lehman Brothers or the ensuing global economic downturn. And in 2011, few could have predicted the Eurozone debt crisis. Neither could people ever predict the pandemic of 2020.
These events remind us that we must always be prepared for the unexpected. That means having an emergency fund in place to cover unexpected expenses and being mindful of how much risk you're taking with your investments. By taking these precautions, you can protect yourself from potential financial hardships down the road.
This also makes the buy-and-hold investment strategy highly risky, as investors can experience a prolonged period of massive drawdowns in their portfolio value. It is always important to be vigilant about one’s hard-earned money and investments.
However, one positive note is that the market always recovers and eventually moves onwards and upwards. So, a longer-term outlook and patience are key.
But most important of all is that one should educate oneself about the market. Everyone directly or indirectly invests in the financial markets and relies on them for their retirement pool. It is unfortunate that financial education, especially on trading and systematically investing in the market, is not taught at high school or college levels, which leaves almost everyone unprepared or underprepared. We strongly believe that this should change in the future. But till then, everyone should make a personal effort to study the market.
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