Manias, panics and crashes part 2

...cont'd from yesterday...

Continuation of discussion about Manias, Panics, and Crashes: A History of Financial Crises

The author, Charles P. Kindleberger, observed that in the three decades since 1970, bank failures worldwide were systemic and involved most (and in some cases all) of the banks and financial institutions in the countries where they occurred.

Generally, the chain of events is as follows: business prosperity, then easily available credit, then spending surge, then price increases, then an event that pauses price increases, then asset selling, then price declines. Banks that financed the spending spree are left with losses when assets are sold for less than the amount of the bank financing supplied to purchase the asset sold. Such losses then become a crisis when the banks become insolvent.

Chapter 1o of the book describes the usual domestic responses to bank insolvency.

...cont'd tomorrow...

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