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.