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Shocks That Shook Economies By: Devansh Gupta (SGGSCC)
Financial panics or crisis have been in existence since the dawn of humanity. Not only they have contributed towards causing tremendous terror for the systems of the economy, but also have caused people to question the viability of current financial systems. People who bet on the markets have been seen losing their entire money in a short span of time. To give a brief idea, a financial crisis is the failure of financial systems, leading to economy slowdown, recession or even worse, depression. The constant pumping of a bubble leads to an eventual burst. Any segment of the economy can face this bubble burst, be it Currency or Debt or Real Estate. What comes next? No one knows. These shocks range from being minor and hence recoverable, to being massive and more destructive. The latter entails a wider population of affected victims and is difficult to cope up from; difficult, but not impossible. Causes The causes and reasons for a financial crisis mainly include Debt (or Leverage), Future Uncertainty, Failure of regulatory measures and lastly, the market’s behavior. Out of all the above mentioned the most potent is Future Uncertainty, which is a quite logical and indelible reason. It is a well-defined fact that the future is unpredictable and the risk involved is massive. The current situation that global economies are facing due to the spread of a contagion, perfectly describes the need to accept this fact. Another major reason that is worth discussion is failure of regulatory measures. These are mainly institutional measures, which lie in the jurisdiction of the Government and other regulatory bodies. It has often happened that these institutions have themselves faced the plight of the crisis. Banks and lending institutions regularly face the risk of payment defaults, and when this repayment bubble pumps and explodes, it affects the parties seriously. The History If you look at the history of financial panics, you would be astounded to find that the first ever panic is believed to have taken place as back as during the 1630s. The Dutch population saw a speculative opportunity in the market when prices of exotic tulips surged. People spent a year’s income on rare tulip bulbs, in a hope to sell them on profit. And as it happens, the price bubble burst and it wreaked havoc on the Dutch economy. The consequences were such that merchants were washed off on the footpaths as beggars, and people were pushed back to their original, mundane life. Even though many authors believe in the above anecdote, there are a few who say that the story has been falsified. What truly happened was a small spur of high-end people speculating in a niche of tulip market. But, till date no substantial proof exists.
