What Is a Financial Crisis?

The financial crisis refers to the crisis of financial assets, financial institutions, and financial markets. The specific manifestations are the sharp decline in the prices of financial assets, the collapse or near-collapse of financial institutions, or the collapse of a financial market such as the stock market or the bond market.

financial crisis

(Financial term)

The financial crisis is a crisis in the financial sector. Because financial assets are highly liquid, the international nature of finance is very strong. The trigger of the financial crisis can be financial products, markets and institutions of any country. ^[1]

Globally

Every time a crisis occurs in the United States, public opinion predicts whether the United States will pass on the crisis through war, and there are always people who have accused of similar cases in the war launched by successive US presidents. The most recent of these was the 1998 Clinton administration's air strike on Iraq, code-named "Desert Fox". Many people believe that the military strike launched on December 17 of that year was to divert domestic attention to the Lewinsky case.

In fact, since the colonial period, Western countries have often transferred domestic crises through war or conflict, and the crisis often becomes the source of war. Specifically, this "transfer" method can usually be divided into two types. One is the indirect route, that is, creating conflict or provoking war in other areas, and causing trouble outside; the other is the direct route, which is Shirtless.

Where is the benefit passed on through the war? Can be explained from the following aspects:

Politically, war can play a role in relieving domestic social pressure and shifting domestic attention. The large-scale war will also reduce the residents' expectations of domestic people's livelihood to some extent. War is often accompanied by the strengthening of domestic control. For example, after the Bush administration launched the "War on Terror", it adopted the "Patriot Act" and other means to greatly strengthen control of public opinion and social life. This kind of social control can also be used to prevent the negative effects of the domestic economic crisis from another aspect.

Economically, war can artificially cause domestic economic mobilization, while the expansion of the military industry can greatly stimulate domestic demand and expand employment. The military-industrial complex and its responding political forces often also support the government's policy of expanding armaments.

Judging from the pulling effect of the military industry, at present, every US $ 130 billion in products produced by US military factories can directly drive GDP growth by one percentage point, and every additional US $ 1 billion in military production can create tens of thousands of job opportunities. . This has not taken into account the indirect pulling effect of the military industry. More importantly, in the current situation, the production of military products can directly stimulate the manufacturing industries most affected by the financial crisis in the United States, such as automobiles, aircraft, and machinery. This has not only economic significance, but also important socio-political significance. .

The premise of stimulating the economy with military production is that it can finally obtain benefits through warfare, otherwise it will face the awkward situation of output and no gain. During the colonial period and the early days of imperialism, every dynasty war and inter-state war was accompanied by huge war reparations. After the Second World War, the proceeds of the war appeared in a more "hidden" form, and no longer "naked" as in the past, for example, seizing the mineral resources of the target country, occupying the market of the target country, and dividing up foreign assets of the target country.

It should be noted that the United States is already at war. However, the wars in Iraq and Afghanistan were clearly worthless. In particular, the proportion of war costs in the two wars was too high, which hindered the army's refurbishment process and affected the interests of military industrial enterprises. Even from this perspective alone, the US withdrawal from Iraq is motivated. Perhaps withdrawing troops from Iraq and re-searching for new adversaries is more in line with the traditional strategy of "profit by war". In other parts of the world, there are potential hot spots that could be the target of such strategies.

Strategies to provoke conflict in other countries can also bring greater political and economic benefits. For example, the parties to a conflict will deepen their political dependence on major powers, and the major powers are usually major military producers, so most of the conflict parties will need to buy arms from the major powers, and will often borrow from the major powers at higher interest rates, or The sale of its foreign assets to cash. During the Russo-Japanese War, Japan borrowed heavily from Britain and the United States. In almost every war, there are a number of countries that have profited a lot from the sale of arms, which have been "recorded in history" as the beneficiaries of the war.

The first is equity reorganization, capital increase and share expansion; the second is the packing of bad debts, cutting and stripping; the third is the injection of funds to solve liquidity. First, the government reorganized financial institutions in crisis and increased capital and stocks. For example, the United States nationalized "two houses" and turned private companies into state-controlled companies. Secondly, the bank's bad debts were stripped off and packed aside. After the bank recovered, the funds were redeemed. If the bank went bankrupt, the government would pay the bills to clear the bad debts. Third, when banks are in a liquidity crisis and ordinary people run, they inject funds and increase cash flow. Either the government can provide guarantees to enhance social confidence, or the government can provide guarantees to allow other banks to borrow money.

The new generation of economic thinking must be innovated in three basic dimensions. First, it must establish the most basic social welfare framework and abolish the pan-welfare system; second, it must build government policies on the basis of a sound, independent and transparent rule of law. An effective regulatory system for financial markets. Third, we must vigorously promote marketization in the production sector and encourage industrial investment. Fourth, the economic system periodically adjusts the progress of structural industry operations.

Economist and columnist John Kay will warn this week that the world is in a new round of financial crisis.

Almost a year after publishing ground-breaking insights into the UK stock market, the London School of Economics and Political Science professor said in a keynote speech this week that "the eurozone may indeed be in a (new round of crisis)."

The professor and British Financial Times columnist spent a year collecting material for his 40,000-word report. He said the reason for this pessimistic stance is that the financial services industry's trading activities tend to be unstable. "We have gone through successive crises, the most notable examples being the debt crisis in emerging markets in the mid-to-late 1990s, the new economic bubble, credit inflation and collapse, and the eurozone crisis."

"In essence, these are transaction crises. The entire system is centered on transaction profits, and transaction profits are basically borrowing from the future. When these funds need to be repaid, it will lead to a crisis." ^[9]

Professor Kay will speak at Russell Investment's annual pension conference in London on June 5. His speech will also explore the possible evolution of the financial services industry over the next decade.

"I started to wonder if, from an economic value perspective, the mission of the public stock market has ended. I don't think they need to exist anymore."

"What we are seeing is a gambling activity that is largely tied to the actual activities of these companies. As long as people understand the facts, that's nothing," he said. "It's like betting on horse racing. It has no effect on horse performance, and it should have no effect. "

He will also explain that there are bubbles in some asset classes as people pursue market-driven profits. "Asset prices were raised to ridiculous levels, but at the same time people were making a lot of money, and the market went into adjustment."

Professor Kay said he would place a "modest personal bet" on the collapse of the euro.

However, there is a silver lining in Britain. He believes that the British government has adopted some reforms, such as separating the bank's retail and investment businesses to protect savers from market crashes.

"Only UBS outside the UK has adopted reforms. Overall, I remain pessimistic about the outlook for the economic system."