Thursday, September 18, 2008

US Financial Crises -Lessons

After the bailout of American International Group (AIG) on the heels of Fannie Mae, Freddie Mac and Bear Stearns, many Americans are no doubt wondering why the government appears to be coming to the aid of fat cats who mismanaged large corporations. Some economists ask a related question of whether it would be better to let these companies fail to send a message to future managers that they had better be prudent.

The current market jitters are centred on disturbances in the world's credit markets. Worries about the viability of sub-prime mortgage lending have spread around the financial system, and the central banks have been forced to pump in billions of dollars to oil the wheels of lending.

But what happened in previous financial crises, and what are the lessons for today?

There have been a growing number of financial crises in the world, according to the International Monetary Fund (IMF).

Among the key lessons of previous major financial crises are:

Globalisation has increased the frequency and spread of financial crises, but not necessarily their severity

Early intervention by central banks is more effective in limiting their spread than later moves

It is difficult to tell at the time whether a financial crisis will have broader economic consequences

Regulators often cannot keep up with the pace of financial innovation that may trigger a crisis.


Jack Payne said...

The Feds had no alternative but to bail our A.I.G. With their world-wide spread operations and big derivatives exposure, there was just too much danger of bringing down hedge funds right along with them.

Sunil K Daga said...

Very true. But the root cause according to me is leveraging. Just updated my blog. pls visit.