World Financial crises In context of Malaysia
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World Financial crises In context of Malaysia
- 1. Financial Crises Dr. Mohamed Eskandar Shah Mohd Rasid Deputy Dean of Graduate Studies - INCIEF
- 2. Wall Street Crash of 1929 - Black Tuesday and PANIC 1997 – Black OF 98 1907, Asian Monday A Financial U.S. (1987) ECONOMIC Crisis RECESSION WITH BANK FAILURE The largest one-day percentage decline in stock market Great Depression 1929 - 1945 history 1997 – 98 Asian Financial Crisis Black Monday (1987) The largest one-day percentage decline in stock market history Wall Street Crash of 1929 - Black Tuesday and Great Depression of 1930 - 1945 PANIC OF 1907, A U.S. ECONOMIC RECESSION WITH BANK FAILURE Hotlist of Crises
- 3. THE PANIC OF 1907 Bankers' Panic or Knickerbocker Crisis
- 4. attempt to corner the market on stock of the United Copper Company October 1907 by Heinze, Moors, Otto & Barney
- 5. Fall Effects Unemployment 8% Imports 26% Production 11% Stock Exchange 50%
- 6. Later to the downfall of the Knickerbocker Trust Company New York City's third-largest trust.
- 7. J. P. Morgan who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system
- 8. Some believed Engineered Panic Others believed Morgan took advantage of the panic to allow his U.S. Steel company to acquire TC&I. Despite Morgan’s role was significant, but still he lost $21M, & lots of Criticism & Scrutiny
- 11. Black Tuesday & Great Depression 1929 - 1945
- 12. Originated in the U.S., after the fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday)
- 13. United States Great Britain France Germany Industrial production –46% –23% –24% –41% Wholesale prices –32% –33% –34% –29% Foreign trade –70% –60% –54% –61% Unemployment +607% +129% +214% +232%
- 18. Monetarists, including Milton Friedman, argue Great Depression was mainly caused by monetary contraction, the consequence of poor policy-making by the American Federal Reserve System and continued crisis in the banking system
- 19. Irving Fisher, argued the predominant factor leading to the Great Depression was over-indebtedness and deflation Paradoxically, the more the debtors paid, the more they owed.
- 20. Decline in productivity the decline in productivity that caused the initial decline in output and a prolonged recovery due to policies that affected the labour market Kehoe & Prescott
- 21. Breakdown of International Trade the sharp decline in international trade after 1930 helped to worsen the depression, especially for countries significantly dependent on foreign trade
- 22. Inequality Economy Produced more, consumed less due to less income by masses; the unequal distribution of wealth throughout the 1920s caused the Great Depression
- 24. Abandoning the Gold Standard
- 26. WW II – Industrial Revolution & Employment Opportunities
- 27. Black Monday (1987) The largest one-day percentage decline in stock market history
- 28. Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time.
- 29. Market Falls Hong Kong 45.50% 26.5% UK Australia 41.8% 31% Spain USA 22.8% 60% New Zealand
- 31. Program Trading
- 33. 1997 Asian Financial Crisis
- 34. Thailand Economic Bubble & Hot Money
- 38. Increase in Interest Rate in US This made US more attractive market for Investment, compared to, in pegged Asian currencies While US made it much more attractive for HOT MONEY
- 41. Solution
- 43. ECONOMIC REFORMS
- 44. Asian Crises & Malaysia
- 45. Pre-Crisis Malaysia Before the crisis, Malaysia had a large current account deficit of 5% of its GDP The KLSE Composite index was above 1,200 The ringgit was trading above 2.50 to the dollar The overnight rate was below 7%
- 46. Crisis Effects on Malaysia The KLSE Composite index declined to 600 The ringgit went to 4.57 to the dollar The overnight rate jumped to 40% from 7%
- 48. Ringgit – Dollar Pegging
Editor's Notes
- The Panic of 1907 – also known as the 1907 Bankers' Panic or Knickerbocker Crisis – was a United States financial crisis that took place over a three week period starting in mid-October, when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies.
- The 1907 panic began with a stock manipulation scheme to corner the market in F. Augustus Heinze's United Copper Company. Heinze had made a fortune as acopper magnate in Butte, Montana. In 1906 he moved to New York City, where he formed a close relationship with notorious Wall Street banker Charles W. Morse. Morse had once successfully cornered New York City's ice market, and together with Heinze gained control of many banks—the pair served on at least six national banks, ten state banks, five trust companies and four insurance firms. Augustus' brother, Otto, devised the scheme to corner United Copper, believing that the Heinze family already controlled a majority of the company. He also believed that a significant number of the Heinze's shares had been borrowed, andsold short, by speculators betting that the stock price would drop, and that they could thus repurchase the borrowed shares cheaply, pocketing the difference. Otto proposed a short squeeze, whereby the Heinzes would aggressively purchase as many remaining shares as possible, and then force the short sellers to pay for their borrowed shares. The aggressive purchasing would drive up the share price, and, being unable to find shares elsewhere, the short sellers would have no option but to turn to the Heinzes, who could then name their price. To finance the scheme, Otto, Augustus and Charles Morse met with Charles T. Barney, president of the city's third-largest trust, the Knickerbocker Trust Company. Barney had provided financing for previous Morse schemes. Morse, however, cautioned Otto that he needed much more money than he had to attempt the squeeze and Barney declined to provide funding.[19] Otto decided to attempt the corner anyway. On Monday, October 14, he began aggressively purchasing shares of United Copper, which rose in one day from $39 to $52 per share. On Tuesday, he issued the call for short sellers to return the borrowed stock. The share price rose to nearly $60, but the short sellers were able to find plenty of United Copper shares from sources other than the Heinzes. Otto had misread the market, and the share price of United Copper began to collapse. The stock closed at $30 on Tuesday and fell to $10 by Wednesday. Otto Heinze was ruined. The stock of United Copper was traded outside the hall of the New York Stock Exchange, literally an outdoor market "on the curb" (this curb market would later become the American Stock Exchange). After the crash, The Wall Street Journal reported, "Never has there been such wild scenes on the Curb, so say the oldest veterans of the outside market".
- The collapse of the Knickerbocker spread fear throughout the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks.
- This was due to the heavy borrowing of a large brokerage firm that used the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. Collapse of TC&I's stock price was averted by an emergency takeover by Morgan's U.S. Steel Corporation—a move approved by anti-monopolist president Theodore Roosevelt. Although Morgan lost $21 million in the panic, and the significance of the role he played in staving off worse disaster is undisputed, he also became the focus of intense scrutiny and criticism.
- The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 23, 1913, that Congress passed the Federal Reserve Act. President Woodrow Wilson signed the legislation immediately and the legislation was enacted on the same day, December 23, 1913, creating the Federal Reserve System. Charles Hamlin became the Fed's first chairman, and none other than Morgan's deputy Benjamin Strong became president of the Federal Reserve Bank of New York, the most important regional bank with a permanent seat on theFederal Open Market Committee
- There were multiple causes for the first downturn in 1929. These include the structural weaknesses and specific events that turned it into a major depression and the manner in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like major bank failures and the stock market crash. In contrast, monetarist economists (such as Barry Eichengreen, Milton Friedman and Peter Temin) point to monetary factors such as actions by the US Federal Reserve that contracted the money supply, as well as Britain's decision to return to the gold standard at pre–World War I parities (US$4.86:£1). Recessions and business cycles are thought to be a normal part of living in a world of inexact balances between supply and demand. What turns a normal recession or 'ordinary' business cycle into a depression is a subject of much debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the issue of avoiding future depressions. A related question is whether the Great Depression was primarily a failure on the part of free markets or a failure of government efforts to regulate interest rates, curtail widespread bank failures, and control the money supply. Current theories may be broadly classified into two main points of view and several heterodox points of view. There are demand-driven theories, most importantly Keynesian economics, but also including those who point to the breakdown of international trade, and Institutional economists who point to underconsumption and over-investment (causing aneconomic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The consensus among demand-driven theories is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could avoid further losses by keeping clear of the markets. Holding money became profitable as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand. There are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve), caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression. Related to this explanation are those who point to debt deflation causing those who borrow to owe ever more in real terms. There are also various heterodox theories that downplay or reject the explanations of the Keynesians and monetarists. For example, some new classical macroeconomists have argued that various labour market policies imposed at the start caused the length and severity of the Great Depression. The Austrian school of economics focuses on the macroeconomic effects of money supply, and how central banking decisions can lead to over-investment (economic bubble).
- General theoretical explanations Mainstream theories Keynesian Monetarist Common position Heterodox theories Austrian School Marxist Specific theories of cause Debt deflation Decline in productivity Breakdown of international trade Inequality Productivity shock
- In this view, the Federal Reserve, by not acting, allowed the money supply as measured by the M2 to shrink by one-third from 1929–1933, thereby transforming a normal recession into the Great Depression. Friedman argued that the downward turn in the economy, starting with the stock market crash, would have been just another recession.
- This work, collected by Kehoe and Prescott, decomposes the economic decline into a decline in the labour force, capital stock, and the productivity with which these inputs are used.
- Most historians and economists partly blame the American Smoot-Hawley Tariff Act (enacted June 17, 1930) for worsening the depression by seriously reducing international trade and causing retaliatory tariffs in other countries. While foreign trade was a small part of overall economic activity in the U.S. and was concentrated in a few businesses like farming, it was a much larger factor in many other countries.[41] The average ad valorem rate of duties on dutiable imports for 1921–1925 was 25.9% but under the new tariff it jumped to 50% in 1931–1935.
- the downturn was spread worldwide by the rigidities of the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did the most to make recovery possible. Every major currency left the gold standard during the Great Depression. Great Britain was the first to do so. According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer.
- The rearmament policies leading up to World War II helped stimulate the economies of Europe in 1937–39. By 1937, unemployment in Britain had fallen to 1.5 million. The mobilisation of manpower following the outbreak of war in 1939 ended unemployment. The US' entry into the war in 1941 finally eliminated the last effects from the Great Depression and brought the U.S. unemployment rate down below 10%.[65] In the U.S., massive war spending doubled economic growth rates, either masking the effects of the Depression or essentially ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts.
- In finance, Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.61%). In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because of the timezone difference. The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.
- After Black Monday, regulators overhauled trade-clearing protocols to bring uniformity to all prominent market products. They also developed new rules, known as circuit breakers, allowing exchanges to halt trading temporarily in instances of exceptionally large price declines. For example, under current rules, the New York Stock Exchange would temporarily halt trading when the S&P 500 stock index declines 7 percent, 13 percent, and 20 percent in order to allow investors to make informed choices when the market is highly volatile.
- The causes of the debacle are many and disputed. Thailand's economy developed into an economic bubble fueled by hot money. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism"
- At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
- Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lender–borrower relationship. The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level. These asset prices eventually began to collapse, causing individuals and companies to default on debt obligations.
- The IMF's support was conditional on a series of economic reforms, the "structural adjustment package" (SAP). The SAPs called on crisis-struck nations to reduce government spending and deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations' fiscal solvency, penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital had to be administered rationally in the future, with no favored parties receiving funds by preference. In at least one of the affected countries the restrictions on foreign ownership were greatly reduced