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? 1 low 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

In economics we consider a numerous situations as financail crises or currency crises where some financial assets suddenly lose a large part of their nominal value. Financial cises could be of many kind like  stock market crashes and thebursting of other financial bubbles, currency crises, and sovereign defaults.If we talk about currency crises specifically, it could be understood as a situation where the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation or appreciation.

IN general a situation when the value of financial institutions or assets drops rapidly is referred to as inflation.

A financial bubble, also known as economic bubble, is a situation in which asset prices appear to be based on implausible or inconsistent views about the future. There are various stages of economic bubble:

Valuations reach extreme levels during this phase. For example, at the peak of the Japanese real estate bubble in 1989, land in Tokyo sold for as much as $139,000 per square foot, or more than 350-times the value of Manhattan property. After the bubble burst, real estate lost approximately 80% of its inflated value, while stock prices declined by 70%. Similarly, at the height of the internet bubble in March, 2000, the combined value of all technology stocks on the Nasdaq was higher than the GDP of most nations.

During the euphoric phase, new valuation measures and metrics are touted to justify the relentless rise in asset prices.

Note that it only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot "inflate" again. In August, 2007, for example, French bank BNP Paribas halted withdrawals from three investment funds with substantial exposure to U.S. subprime mortgages because it could not value their holdings. While this development initially rattled financial markets, it was brushed aside over the next couple months, as global equity markets reached new highs. In retrospect, this relatively minor event was indeed a warning sign of the turbulent times to come.

One of the most vivid examples of global panic in financial markets occurred in October 2008, weeks after Lehman Brothers declared bankruptcy and Fannie Mae, Freddie Mac and AIG almost collapsed. The S&P 500 plunged almost 17% that month, its ninth-worst monthly performance. In that single month, global equity markets lost a staggering $9.3 trillion of 22% of their combined market capitalization.

The financial crisis of 2007 to 2008 occurred mainly because the economy failed to constrain the financial system’s creation of private credit and money.

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