What is currency crisis (or financial crisis)? What are the major stages of a fi

Question

What is currency crisis (or financial crisis)? What are the major stages of a financial bubble? Use one example (Mexican peso crisis, Asian financial crises, Argentine financial crisis, or 2008 financial crisis) to illustrate these stages. What major causes can you identify for the financial crises during the last decade? How does the "Mundel Trilemma" (or the "unholy trinity", pp. 255-257) create challenge to policy options? Facing a financial crisis, what can the IMF and the affected state do to alleviate the crisis? What lessons can be learned from the past financial crises?

Explanation / Answer

A currency crisis is when, serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate. The crisis is often accompanied by a speculative attack in the foreign exchange market.

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is trade in an asset at a price or price range that strongly deviates from the corresponding asset's intrinsic value

The recent crisis is an expression of the structural changes and deep-rooted contradictions which have occurred within the global system in the last 30 years. As a result, today’s global economic system is marked by three profound vulnerabilities: 1) the explosive growth of the financial system relative to manufacturing and the economy as a whole, and the proliferation of speculative and destabilising financial instruments of wealth accumulation; 2) the loss of relative power by the US, and the rise of other centres of accumulation; 3) resource depletion and ecological crisis. I am hoping that by examining each of these three areas where contradictions and vulnerabilities have been structurally emerging by the very logic of the global economic system and the process of capital accumulation, I can offer a more comprehensive understanding of the deeper roots of the current financial crisis and serious deep and synchronised economic downturn. ( Bulent Gokay, Global Research, February 15, 2009)

*Note: case on Mundel Trilemma is not given

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