Suggestions to prevent

Financial panics and crises happen in different situation and background. People haven't find ways to totally prevent or stop them from happening. But from the research, I think at least we can minimize the possibility of happening.

As many recent crises are caused by sub-prime loans, it is necessary to insist strict principles of the loan approval. Also, the laws or principles should be regulated to adjust to the change of the world situations. Thirdly, governments should strengthen the monitoring to the market and give warnings when necessary. Moreover, private and public sectors should provide sufficient and reliable information in time to raise their transparency.

Although it is the market economy, the healthy financial system still need some macro control from the governments to solve problems and overcome difficulties.

Study of real cases

This week I would like to study some real cases of financial panics and crises. The aim of the study is to find out the underlying reasons of financial panics and crises, and figure out how to prevent them. I choose several representative cases, panics of 1907, 1987 and 2008. As panics in 19^th century do not have reference significance for the world situation in modern times, I would not talk about them.

The panic of 1907

During the Panic of 1907, there were bank runs all over America. Numerous depositors withdraw their deposits from banks and trust companies. It first started in New York, then spread all over the country and lasted for about six weeks. It is said that all these things are caused by the failure of new financial instrument.

One direct cause of this panic which shocked the depositors is that F. Augustus Heinze's failed to corner the stock of United Copper Company. Contemporary observers like O.M.W. Sprague (1910) said that the discovery of the close associations between bankers and stockbrokers raised the anxiety of already nervous depositors to a great extent.

The panic of 1937

An economic downturn happened in 1937 during the Great Depression in the US. The panic of 1907 is actually a part of regression. In the beginning of 1037, the situation of production, profits, wages and employment had recovered a little. But in the middle of that year, the economic suddenly fall down. This downturn didn’t stop until 13 months later. The employment rate rose to 19% in 1938, while in 1937 it was just 14.3% [Figure 1].

However, economists have different views about what causes the downturn. Keynesian economists claim that the cuts in federal spending and increases in taxes are what to blame. Some monetarists, such as Milton Friedman think that the reasons are the Federal Reserve’s tightening of money supply. And another economist, Johnathan Catalan, argues that the large expansion of the money supply from 1933 to 1937 is the main cause although the money supply start to tighten just after the recession began.

The panic of 2008

The crisis started with a serious of failures of banks and insurance companies. For instance, some big companies, such as Lehman Brothers, declared bankruptcy in September and Fannie Mae (FNM) and Freddie Mac (FRE) were both taken over by the government.

The panic in 2008 was different from the panic happened in 1930s. It started with a serious crisis which made many big companies in Wall Street break down. According to John B, Taylor (2009), the government actions and interventions caused the panic and made the whole situation worse. He also argued that the monetary policies in the US lead to housing boom and bust, and the use of sub-prime mortgage is also a culprit.

References
Sprague, Oliver M.W., (1910). History of Crises under the National Banking System. 
Maurice W. Lee, (1955). Economic Fluctuations
Krugman, P., (2008).  About the Great Depression.The Great Depression: an international disaster of perverse, Pages 148-149
Finegold Catalan, Jonathan M. (2010). Dangerous Lessons of 1937.
John B. Taylor., (2009). Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. 

Causes and effects

Financial panics and crises always happen together. Especially in the 19th and early 20th century, many financial crisis were associated with panics. I would like to talk about their causes and effects together. 

Nowadays, it is seems that sub-prime mortgage crises is the direct reason of financial crises. Actually, there are variety causes of financial panic and crises. As I see, these reasons can be mainly divided into four types.

The first reason is the political and social instability. For example, when a regime of a country is not stable, people lose confidence in its economy and may withdraw money from banks. Then financial panic and crisis happen. Recently, this situation is not common as before.

Then, some unreasonable  macroeconomic policies which are unsustainable can also cause financial crises.  For example, in George Bush's term, he deregulate the financial system and support the military industry. During this term, the condition of American financial system became worse and more risky.

Thirdly, if there are problems in financial system and the financial regulatory is unsound, the situation would become serious. For example, Dominique Strauss-Kahn, the former managing director of IMF, has argued that the cause of the  financial crisis of 2008 is 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'*.  

At last, the deterioration of the international financial environment and exchange rate problems are also effective reasons.

While some financial crises have little influence of the financial sector, most of them can lead to serious effects. They may lead to decrease in the rest of the economy and regression in the whole country or even the world. When financial crises happen, panics can increase the risk of destructive. Sometimes, even when a bank still has the ability to pay back to debtors, people drawback their money because of their fear and make the situation worse.

References

Strauss Kahn D., (2008).  A systemic crisis demands systemic solutions, The Financial Times.

Financial panics and crises

In this semester, I would like to conduct a research study on financial panics and crisis. I choose this topic because although I am familiar with financial crisis, the concept of panic is a bit strange for me. I feel really curious about it and want to find the relationship between panics and crisis.

Financial crisis usually means a variety of situations in which some financial assets suddenly lose a large part of their nominal value (Haidar, Jamal Ibrahim, 2009). The form of financial crisis is used to describe different types of crisis across financial sector all over the world. Due to the liquidity of the financial assets, the financial crisis can start in any single country and spread to the worldwide.

Financial Panics, events during which bank depositors attempt to withdraw their deposits, equity holders sell stock, and market participants in general seek to liquefy their assets (http://www.answers.com/topic/financial-panic). It can lead to or deteriorate financial crisis. As I see, it can be also used to describe a phenomenon during the financial crisis, in which a lot of creditors withdraw their fund from the debtors, even though the debtors still have the ability to refund. 

Financial panics and crisis are firmly connected. They also follow each other or happen at the same time.

Now I am reading a book about the Panic of 1907, as I want to see closely to financial panics' effects. And in next a few weeks I will talk about this great panic.

References

Haidar, Jamal Ibrahim, 2009. "The mark-to market valuation and executive pay package regulations within the 2009 US (Bailout) Emergency Economic Stabilization Act", Journal of Economic Policy Reform, Taylor and Francis, vol. 12(3), pages 189-199, September

http://www.answers.com/topic/financial-panics#ixzz2KVwmrtIe