The world’s financial markets are destined to be stuck in a loop, forever repeating history, as overspending and bad business decisions result in financial crisis for everyone. This has been the pattern in the world since the financial industry began.
A look back over the last 30 years or so sees the same pattern repeating itself – excessive and unrestrained exuberance, poor regulations, poor accounting and a sense that “it won’t happen to me”.
This is a look at some of worst crises to hit the world markets since 1980 and how, it would seem, lessons are never learned.
1982 – Latin American Sovereign Debt
This crisis occurred when a number of Latin American countries, who had been irrationally spending and running up deb for years, suddenly took stock and realized they had no hope of paying it back.
Mexico, Argentina and Brazil were the biggest culprits, using borrowed money for infrastructure and development. Their economies were in a boom period and banks were happy to loan money. In just 7 years, the debt in Latin America quadrupled.
The crunch cane when the world went into recession in the late seventies – interest rose, currencies fell and, in August 1982, the then Mexican Finance minister, Jesus Silva-Herzog, declared that Mexico could not pay.
1980’s Savings and Loans Crisis
While the problem in Latin America was being resolved another one was taking place in America. The Savings and Loans crisis lasted for more than a decade following the breakdown of more than 700 different savings and loans associations in America.
It happened because each of these associations was lending money long term at fixed rates but was using short-term cash. Interest rates went up, many companies were insolvent but, because of a stream of deregulation that happened when Ronald Reagan was the president, many managed to appear as if they were actually still solvent.
1987 – Stock Market Crash
Despite what happened in the eighties, lessons were not learned and another two crises happened before 1989. The biggest one was the stock market crash of 1987, now commonly known as Black Monday.
Stock markets around the world fell fast, including the US where the Dow Jones lost 23% of its value in hit. There is still, to this day, much debate about the cause of the crash but the consensus seems to be program trading and its growth.
It lasted only a very short time and. By December of the same year, the markets were on the up again and everything was back to normal, as if it had never happened.
1989 – Junk Bond Crash
This one resulted in a rather significant recession in the US and there is still disagreement about the cause. Most people point the finger at the buyout of UAL, costing $6.75 billion, while other says it was the Ohio Mattress Fiasco.
Whatever the reason, the result was one of the most expensive to ever hit the US and it resulted in the closure of one of the largest investment banks in the US, Drexel Burnham Lambert, who dealt heavily in Junk Bonds.
1994 – Tequila crisis
This one was kicked off by the sudden devaluation of the Peso in Mexico and it resulted in an interest rate crisis of massive proportions. The cause of it was the new President abolishing tight currency controls that were put in place by his predecessor. His reasoning was that, although they stabilized the market, the controls also place a huge strain on the country’s finances.
Before he took power, banks were lending at low rates and with Chiapas, one of the poorer southern states, rebelling, the peso fell in value by almost 50% in the space of a week. The US bailed Mexico out to the tune of a $50 billion loan and the economy picked up almost immediately.
1997 – 1998 – Asia Crisis
Over 15 years after the LatAm crisis in 1982, history repeated itself in Asia. The Thailand currency, the baht, collapsed in July 1997 after the government was forced it float it on the market.
Thailand was in debt in a big way, money it could pay back even before their currency broke down and the financial crisis quickly spread across Asia. Once again, the IMF came to rescue with a bailout to the tune of $40 million but the exact same thing happened in Russia just one year later.
1999 – 2000 – Dotcom Bubble
Once again, the financial markets forget everything that had happened in the past and the result was the burst of the Dotcom bubble in 2000. Preceding the crash, stocks in technology and internet pushed the stock format into a bull market, crating millionaires overnight.
The fact that so few people actually made any money was largely ignored and hysteria continued to build until the inevitable burst in 2000. The economy put the brakes on and interest rates went up, resulting in companies going bust everywhere.
2007 – Date – Global Financial Crisis
A mere few years after that crash, the world went into its nastiest meltdown yet, resulting in the European Sovereign debt crisis. Many major financial institutions collapsed and this is considered to be the worst crisis to hit since the Great Depression.
There are many causes to this crisis but the main starting point was when the US housing market crashed. That crisis is ongoing to this day and, although many countries are now struggling out of the depths, it is expected to be several years before full recovery is experienced.
Have we learned our lessons?
Probably not. It seems that the world’s financial markets are stuck in an endless loop of repeating themselves. Markets boom, prices and interest rise. It reaches a point where it can’t be sustained and everything crashes to the floor.
Every time there is a crisis, new regulations are brought out to prevent a recurrence. It doesn’t work and there are those that believe we need the crashes to make the world a stronger place