Briefly summarize the common features and consequences of historical financial crises.
According to the authors, certain factors indicate that a country is on the verge of facing a severe financial crisis. The asset prices start to inflate, huge deficits are observed in sustained current accounts, leverage starts rising, and economic growth of the country starts to slow down. The aftereffects of the financial crisis are observed to be almost similar in every country. Similar patterns are observed in equity and housing prices, government revenues, debts and unemployment.
By taking the global financial crisis into consideration, it is observed that all the countries that faced it had three characteristics in common; First and foremost, asset markets were badly collapsed. Housing prices collapsed by 35% on average over 6 years and the equity prices face a decline by an average of 55 percent over 3.5 years. The second characteristic is associated with employment and the decrease in output. The employment rate decreases on average 7 percent over 4 years, and the output declines by 9 percent on average over two years. The third characteristic is that the debts of the government rise by an average of 86 percent which is huge. The reason for this debt explosion is the severe crumbling of the government tax revenues along with the recapitalization of the banking systems and the bailout costs.
The authors have described that along with the United States, there are countries that are currently facing the banking crisis. It includes Hungary, Ireland, Iceland, Austria, the United Kingdom, and Spain. When the inflation in housing prices of these countries is taken into account; the average in decline is found to be 35.5 percent. The most severe inflation in real housing prices was faced by the countries that include the Philippines, Finland, Hong Kong, and Colombia. It was measured to be over 50 percent. The decline in the housing prices currently in the United States is estimated to be almost 28 percent. And the duration of the decline is around an average of six years. The collapse of the equity prices in a financial crisis is far more than that of real housing prices, but the duration is comparatively shorter.
The authors of this article have explained that the aftermaths of the banking crisis are quite large in many countries as far as unemployment is concerned. The unemployment rate increases by an average of 7 percent and lasts around 5 years. However, in the postwar period, the employment rate is measured to have declined from a maximum of 20 percent. It is a weird fact that in the times of financial crisis, Asian markets appear to do quite better than the countries having advanced economies regarding employment. The researchers have suggested that the reason for this fact is that the advanced economies have greater margins to inflate, i.e. The wages of the employees experience a huge decrease in such countries at the time of severe financial crisis. However, the case with the GDP around an economic crisis is different. The declines in GDP experienced in post-World War 2 periods were shorter in advanced economies rather than the economies of emerging markets. This decline also lasted for a smaller period as compared to unemployment. The increase in government debts in the following three years of the financial crisis is massive and is recorded to be over 86 percent.
The financial crises have long-lasting plus deep effects on output, asset prices, and employment. Real housing prices decrease massively, and the unemployment rate rises for quite a few years. But the output falls for only a short period. The aftermaths of the banking crisis were worse during post-war periods. The economic growth of the country is severely damaged (Reinhart and Rogoff).
Work Cited
Reinhart, Carmen M and Kenneth S Rogoff. “The aftermath of financial crises.” The American Economic Review 99.2 (2009): 466-472.
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