Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however, and financial crises are still a regular occurrence around the world.
Type of Financial Crisis:
- Banking crises
When a commercial bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch.
Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. The collapse of Bear Stearns in 2008 is also sometimes called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank. The U.S. savings and loan crisis of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990-1991.
- Speculative bubbles and crashes
Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the value of the future income (such as interest or dividends) that would be received by owning it to maturity. If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.
Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the Dutch tulip mania, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000-2001, and the now-deflating United States housing bubble.
- International financial crises
When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.
Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992-93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997-98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government debt.
- Wider economic crises
Main articles: Recession and Depression (economics)
A downturn in economic growth lasting several quarters or more is usually called a recession. An especially prolonged recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation. Since these phenomena affect much more than the financial system, they are not usually considered financial crises per se. But some economists have argued that many recessions have been caused in large part by financial crises. One important example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the world is widely expected to lead to recession in the U.S. and a number of other countries in 2008.
Nonetheless, some economists argue that financial crises are caused by recessions instead of the other way around. Also, even if a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, and Ben Bernanke has acknowledged that he agrees.
* [source: wikipedia]Now let us see what are they say on the Financial Crisis:
1. Muhammad Yunus
A Nobel Prize-winning academic turned micro-finance banker for the poor has important advice for Washington. Muhammad Yunus believes that the government bailout of the banking system is but the first step in redesigning the global credit system. In the end, Yunus believes that a new self-correcting market system will have to be created.
In 1983, Muhammad Yunus set up the Grameen Bank in Bangladesh and ushered in the era of micro-finance and social entrepreneurship. By offering tiny amounts of credit to poor people, mostly women, to finance small businesses, he contradicted the established banking norms of the day. As a consequence, he received an unrelenting barrage of criticism from bankers and economists. Today, however, Grameen Bank, which won the Nobel Peace Prize jointly with Yunus in 2006, has a portfolio of loans a lot more solid than the portfolios of most large, global commercial banks—and Dr. Yunus is smiling. "Our system is based on trust, not collateral or guarantees, and still the people pay back," he said recently in an interview with BusinessWeek. "Conventional banking has always been represented as a perfect, self-correcting system. We see that it is not. It is collapsing as banks run to the government for a bailout."
And that is a huge mistake, says Yunus, who holds a PhD in economics from Vanderbilt University. In the past, government charity didn't help alleviate poverty in Bangladesh or most of the Third World. Instead, market-driven micro-finance offerings from Grameen Bank and others have enabled millions of people to get themselves out of poverty. It's also a system with a very good pay-back history: Poor people pay back their loans at average or above-average rates.
In the same way, government bailouts of the existing banking system are not a long-term solution either, says Yunus. "The solution is for the market to find a solution, not for the government to bail out a defective system." Yunus argues that a new banking system, based on market principles, with proper government regulations, but not ownership, needs to emerge from the current crisis. In the same way, the financial system, working through the markets, has to be enabled to redesign itself and emerge as a regulated system that operates outside of government control.
2. Tun Dr Mahathir Mohammad (Malaysian 4th Prime Minister)
Indeed West banks & financials system already failed. The World has to evaluate to replace it to other system such as Islamic banking and trading with peculiar currency such as Gold Dinar.
Gold will have value anywhere in this world. Gold Dinar is suggested to payment purposes only on international trade.
Bail-outs are not going to work. We have seen that already. Even partial or complete nationalization of banks and other financial institutions will not really help in turning things around.
3. Harun Yahya (Adnan Oktar - A prominent Turkish intellectual)
The situation that has appeared in the markets as a result of the recent economic crisis in America especially and the developed countries of Europe, has been seen as “Darwinism finance - literally the survival of the fittest for the banks,” by some sections of the foreign press. Some press organs have even claimed that “Darwinism rules the market” in the countries in question.
This description stems from the concept of the “strong overcoming the weak” that lies at the root of Darwinian thinking. The fact is, however, that the concept of the strong overcoming the weak is not one that came into being just when Darwin said it. It is not Darwinism that brought the concept into being. Therefore, an imaginary Darwinist concept is not justified by the survival of the strongest banks in the market, and the situation does not constitute an example of Darwinism.
The first cause of the financial crisis that has hit the entire world is the interest system. This, made unlawful by our Lord, has been shamelessly implemented as it has been depicted as attractive in societies based on self-interest only, and people thought they would never come to harm from it but would always make profits. Under the attractive-seeming appearance of the interest system, people were encouraged to invest their money in banks rather than in the direction of production or investment. Since there is no production or flow of capital in a system in which people hide their money in banks, in safes or under the mattress, financial troubles such as high costs of living, inflation or economic collapse are the inevitable result. That is what happened in the global financial crisis in question; the halt in production, the absence of a money flow and money being kept in banks to earn interest caused the economy to collapse.
Some people, greedy to accumulate goods and money out of concern for the future and a love of material things, are unwilling to spend the money they possess, and are parsimonious with it. These people’s policies are generally built on the increasing weakening and elimination of the weak while they save and become increasingly strong and rich. For that reason, they have no compunctions about exploiting the poor, never give alms, never behave generously, never spend money even on themselves, but constantly save up against some unknown day in the future. The fact is, however, that because of the lack of production, this money that they generally keep in reserve and think will bring them profits through the interest system is unable to keep pace with inflation and loses value. This money has never produced the anticipated abundance. Stagnant production has always been the consequence of this money excluded from the markets out of parsimony.
It is impossible for such a financial crisis to arise in the absence of an interest-based financial system, where people are not parsimonious and hide their money away, when they employ it generously for production, when they make proper use of the money in their possession, when they give alms and, most important of all, when they submit to Allah and believe with all their hearts that it is Allah Who will bestow money and wealth. It is impossible for people to become poor under such a system. When the rich help the poor, the poor will also have purchasing power. That will make production necessary. When manufacturing rises and people have purchasing power, factories will operate and sales will rise to high levels. The markets will immediately revive and money kept in banks and under mattresses that benefits nobody at all will enter the markets again. The poor will grow richer, and the rich will grow richer still. The abundance caused by the re-emergence of money that had been hidden away will, of course, be very great. This is the only solution capable of solving the problems facing all the countries of the world.
Well that are what they says.
I believe the world can look for solution to seek for the justice-based financial sytem.
What say ya? any opinion?