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FINANCIAL CRISIS

FINANCIAL CRISIS. Nina Kathrina S. Pineda. DEFINITION. Value of financial institutions or assets drops rapidly Often associated with a panic or a run on the banks Investors sell off assets Withdraw money from savings accounts . Source: investopedia.com. Effect on Economy.

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FINANCIAL CRISIS

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  1. FINANCIAL CRISIS Nina Kathrina S. Pineda

  2. DEFINITION • Value of financial institutions or assets drops rapidly • Often associated with a panic or a run on the banks • Investors sell off assets • Withdraw money from savings accounts Source: investopedia.com

  3. Effect on Economy Source: ECON121 lecture handout

  4. IN-DEPTH GLOBAL FINANCIAL CRISIS

  5. Tulip Mania Netherlands, 1637

  6. Tulip Mania • Tulips imported from Turkey to the Dutch • Became a famous novelty item • Was infested with “mosaic virus” • Flames of color on petals • Increased the “rarity” of the flower • An increase in price depending on virus alteration

  7. Tulip Mania • High resale value of the tulips • True bulb buyers reacted to this craze • Depleted supply, increased scarcity & demand • Dutch reacted to the increasing price • Traded their lands, life savings, etc • Liquidated their assets

  8. Tulip Mania • Speculative bubbles • Exaggerated expectations of future asset value growth, etc • Sell their tulips and “crystallize” profit • Response of massive tulip owners • Many are selling, Few are buying • Low selling price of tulips (remarkable losses)

  9. Tulip Mania • Government reaction • Offered “honor contracts” (10%) • Did not help, made the situation worst “Investors now can know that it is better to stop and smell the flowers than to stake your future upon one.”

  10. The Great Depression 1930

  11. The Great Depression • 40% drop in the market (September 1929 – October 1929) • Rampant “uneducated” investors • Were subjected to swindling and manipulations • “Behavioral finance” • Many invested because of good Stock Market reputation • Make everyone rich • Industrializaiton (luxuries) • No-risk, no-brain world Ended this 12 year depression with a declaration of war

  12. The Great Depression • The Great Plains experienced droughts and dust storms • Farmers in debt • Banned loans for farmers (leaving the farmers homeless & unemployed) • Rail riders • Pres. Herbert Hoovert was replaced by Pres. Franklin Roosevelt • Roosevelt closed all banks (opened them once they are stabilized) • NEW DEAL programs After the bombing of Pearl Harbor and US entry to WWII, great depression ended

  13. Wall Street Crash London, 1929

  14. Wall Street Crash of 1929 • Beginning of the 10-year Great Depression • October 24, 1929 (Black Thursday) • Massive sell off in the stock market • Rise of new industries (broadcasting and carmaking) • Aforementioned shares fell by 13% • 12.9 Million shares traded (to salvage losses) • Dow Jones Industrial Average (closed 6 points) • Investment companies bought up stocks

  15. Wall Street Crash of 1929 • Factors that caused Wall Street Crash of 1929 • Rampant proliferation of Holding Companies & Investment Trusts • Inability of large banks to liquidate • Economic Recession prevalent • Credit tightening by Federal Reserves • Discount rate from 5% to 6% (August 1929) • Rampant Speculation • Lost investment value and owed money to creditors

  16. Asian Financial Crisis Asia, 1997-1999

  17. Asian Financial Crisis • Southeast Asia (Asian Tigers/ Asian Economic Miracle) • International hotspot for investment • High short-term interest rate of ASEAN countries • Advantage to foreign investors • Increased capital flow

  18. Asian Financial Crisis

  19. Asian Financial Crisis

  20. Asian Financial Crisis • Regional currencies depreciated • Stock Markets crashed • Poverty was felt (increase in political destabilization) • IMF’s bailout packages • Remove faults in exchange for debt defaults • Government expenditures cut down • Failure of banks • Higher interest rate

  21. Dot com bubble 1995-2000

  22. Dot Com Bubble • “DOT COM COMPANY” • Internet based company • Stocks where used to finance internet startups • Many invested with expectation of high return • Rampant day trading • Causes • High business spending • Market correction • Unemployment of computer developments and programmers • Terrorist attacks in US (9-11 attack)

  23. Housing Bubble & Credit Crisis 2007-2009

  24. Housing Bubble & Credit Crisis • Housing bubble centered in US & Britain • Credit crisis occurred around the world • Resulted from Dot Com Bubbles • Federal reserves kept short-term interest rate • This condition coincided with a global savings surplus • Due to high savings that accumulated large reserves • Global interest rate decreased • Investors were alarmed of this low return

  25. Housing Bubble & Credit Crisis • Great Moderation • Associated high risk to high return • Above-average return • Below-average volatility • Great Moderation coincided with the housing boom • High real estate prices • AAA-rated securities mortagages

  26. Housing Bubble & Credit Crisis • Decline of the housing boom • Decrease in prices • Large losses (resulted to World’s largest bank crisis) • Credit crisis • Stocks fell 50% or more • Remarkable volatility in financial market • Bankruptcy of corporations (corporate bonds)

  27. THANK YOU FOR LISTENING!  Have a nice day! 

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