Kwon 1

HyuckJoon Kwon

Sara Getzin

WRT287

4/18/2023

Understanding the Patterns and Causes of Economic Crises across History and Regions

The global financial crisis between 2007 and 2009 serves as a poignant reminder of

crises' intricate and complex nature. The crisis targeted nations of varying sizes and economic

statuses indiscriminately. As aptly characterized by Reinhart, Jacob, and M. Belen (22), financial

crises pose a threat to all without discrimination. The sources of these factors may be domestic or

external and may originate from the private or public sectors. Biodiversity manifests in various

morphological and physiological characteristics, undergoes evolutionary changes, and exhibits

the potential for swift transnational dissemination (Marksoo, Luiza, and Ulrich 57). Frequently,

urgent and all-encompassing policy measures are necessary to address them, entailing significant

transformations in the financial sector and fiscal policies and potentially mandating worldwide

policy coordination.

The significance of comprehending crises is underscored by the far-reaching

repercussions of the most recent global financial crisis. The recent episode has demonstrated that

financial instability can have significant implications and considerably impact the

implementation of economic and financial strategies (Eichengreen). The comprehensive

examination of the outcomes and optimal reactions to crises has emerged as a crucial component

of contemporary policy discussions, given that the enduring consequences of the most recent

crisis continue to be experienced globally.

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This essay offers a comprehensive overview of the existing literature pertaining to

financial crises. At a certain level, crises represent extreme manifestations of the relationships

between the financial sector and the real economy. Therefore, comprehending financial crises

necessitates a comprehension of macro-financial connections, which is an intricate task.

Economists and policymakers employ various analytical tools, such as macroeconomic models,

historical case studies, and financial indicators, to comprehend economic crises' patterns and

underlying reasons. By identifying fundamental factors that trigger economic crises,

policymakers can devise more efficient approaches to avert or alleviate their consequences and

foster sustainable economic progress and advancement. The article's aim is limited in scope, as it

provides a concentrated overview that addresses three particular inquiries. Initially, it is

imperative to identify the principal categories of financial crises. The article briefly describes the

controversies and differences of opinion among experts pertaining to the patterns and underlying

reasons behind economic crises throughout various historical periods and regions. Additionally,

the effectiveness of these differing perspectives is evaluated.

Patterns and Causes of Economic Crises across History and Regions

Greek government-debt crisis

The Greek government's debt crisis is a multifaceted phenomenon that scholars across

various fields of study have thoroughly examined. Although there is no consensus regarding the

precise origins of the crisis, most academics concur that it was brought about by a combination

of factors encompassing economic, political, and institutional components. As per the analysis

conducted by Williams and Vorley, the Greek government-debt crisis can be attributed to a

prolonged period of fiscal mismanagement, inadequate institutional frameworks, and a lack of

political determination to implement necessary reforms. According to the authors, the borrowing
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activities of the Greek government during the 2000s were facilitated by low-interest rates and

easily accessible credit. This resulted in an unmanageable debt load that ultimately precipitated

the crisis. The Greek government's capacity to gather taxes and administer public finances was

hampered by corruption and inefficiency.

On the other hand, it might be argued that macroeconomic imbalances, institutional

weaknesses, and structural deficiencies within the Greek economy caused the crisis in Greece.

The Greek economy exhibited low productivity levels, a substantial informal sector that impeded

tax collection efforts, and a significant amount of public debt. According to Williams and

Vorley, the Greek government's accession to the eurozone in 2001 resulted in a phase of

accessible credit and reduced interest rates, which stimulated a borrowing frenzy that ultimately

precipitated the crisis.

The Greek crisis was influenced not only by economic factors but also by institutional

factors of notable importance. According to Maris, Pantelis, and Napoleon (2001), Greece's

accession to the eurozone reduced the nation's competitiveness. This was due to the fixed

exchange rate, which caused an increase in the cost of Greek exports. The authors' argument is

that the eurozone's institutional framework was flawed, which in turn, worsened the crisis and

impeded Greece's ability to implement essential reforms. This was primarily due to the absence

of a unified fiscal policy. In addition, the presence of institutional deficiencies within Greece's

public administration and judicial system has had a detrimental impact on the government's

capacity to execute reforms efficiently. According to Maris, Pantelis, and Napoleon (2019),

Greece's public administration suffered from nepotism, corruption, and a dearth of meritocracy,

which had a detrimental impact on the government's capacity to gather taxes and effectively

oversee public finances. As a result, the judicial system in Greece exhibited inefficiency and a
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lack of autonomy, thereby impeding the government's ability to enforce laws and regulations

with efficacy.

COVID-19 INFLATION CRISIS

In macroeconomic models, inflation expectations play a crucial role in influencing

diverse decisions, such as consumption, saving, borrowing, and wage bargaining. As a result,

these expectations exert a direct influence on the actual level of inflation that is observed.

Inflation expectations are a crucial variable that policymakers closely monitor. According to

Ebrahimy, Deniz, and Sole Martinez, during the initial stages of an economic crisis, the primary

focus of policymakers is not typically on inflationary risks when devising an immediate policy

response. However, it is crucial to monitor the fluctuations in inflation expectations during a

crisis to predict the efficacy of monetary and fiscal policy interventions in stimulating the

economy.

The COVID-19 pandemic has caused an exceptional economic crisis due to its origins as

a health crisis and the resulting disruptions, including stay-at-home mandates and temporary

business closures. The impact on the economy was sudden and severe, with a record number of

US workers filing for unemployment within four weeks. The crisis was also characterized by

high uncertainty regarding its duration and long-term impact. Policymakers responded quickly

with monetary and fiscal measures, including the Federal Reserve lowering its target rate to the

effective lower bound and the CARES Act providing over $2 trillion in stimulus (Armantier et

al.).

Key

patterns

observed
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during the crisis included disruptions in supply chains that led to higher prices for certain goods

and services, particularly those imported or requiring complex manufacturing processes. This has

been compounded by global trade tensions, which have disrupted trade flows and led to

increased protectionism

a–I, shows the Harm brought about by the Covid-19 crisis to the economies of nine

nations (as expressed as a percentage of lost value): China (a), New Zealand (b), the United

States (c), Vietnam (d), Nigeria (e), Malaysia (f), Kazakhstan (g), Jamaica (h), and Mongolia (i).

Nations in the top row include China (affected in the China-only scenario), the industrialized

nations of Europe and the United States, and New Zealand (affected only in the global scenario).

In order to gauge the impact on other nations, the global scenario includes those in the middle

row that rely heavily on China's supply chain. Countries having a single major economic sector

are shown on the bottom row. There are a total of 12 possible outcomes shown throughout the

three different plots. Two months in the blue, four in the green, and six in the red denote

intervals of two, four, and six months, respectively. The bars' solid areas reflect the propagation,

whereas the hashed areas represent direct losses owing to containments. Additional findings for a

few additional nations are available in the Supplement.

According to Coleman et al., the degree of inflation expectations is contingent upon individual

attributes such as gender, age, educational attainment, and political affiliation. According to the

authors, the German economy's optimal functioning is contingent upon maintaining price

stability. Entrepreneurs can effectively strategize their investments when inflation is consistent,

predictable, and maintained at a low level. Likewise, individuals can effectively strategize their

monetary reserves and expenditures, thereby contributing to the economy's expansion. The

inflation target of the European Central Bank typically stands at approximately 2 percent.
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Coleman et al. reported that more individuals expected that inflation rates would exceed 2%

amidst the COVID-19 pandemic. Entrepreneurs encounter difficulties establishing optimal

pricing strategies and face obstacles in effectively managing their expenditures.

The Dotcom Bubble

The Dotcom Bubble was a financial phenomenon that impacted the valuation of

technology-related equities in the American market from the late 1990s to the early 2000s. The

occurrence was instigated by the fervor surrounding the emerging Internet sector, the focus of

the media, and the financial projections of gains by dotcom enterprises. Between 1995 and 2000,

the NASDAQ Composite Index witnessed a significant surge in the value of stocks belonging to

Internet-based firms, with prices experiencing exponential growth of more than 400%.

Subsequently, the bubble experienced a collapse in 2002, leading to a significant decline in stock

prices by approximately 78% (Leone and De Medeiros 77). The economic downturn profoundly

impacted the United States, resulting in the demise of numerous companies.

The proliferation of the Internet engendered the emergence of the dotcom bubble. The

phenomenon under consideration predates the 1990s; however, it was during this period that it

underwent democratization. A number of technology start-ups utilizing a ".com" domain

commenced providing services to enterprises within the burgeoning industry. Nevertheless, the

issue was that they executed their actions without adequate strategic planning for their enterprise

and the generation of financial resources.

During the Dotcom Bubble, one major contributor to the disaster was the widespread

adoption of fraudulent accounting methods. Leone and De Medeiros claim corporations inflated

their sales and profits to entice investors (80). Many businesses committed accounting fraud by

adopting creative accounting techniques, such as recording unearned income or overstating

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business costs. The fall of the huge energy corporation Enron in 2001 is often cited as an

example of this form of accounting fraud. In order to deceive investors and authorities, Enron

inflated its sales and profits via complicated accounting procedures (Petra and Andrew).

Accounting methods and standards have come under closer scrutiny since the fall of Enron and

other comparable businesses.

Low-interest rates also contributed to the Dotcom Bubble by making credit more

affordable. Since interest rates were low in the late 1990s, many people were willing to put their

money into risky internet startups that didn't care much about making a profit. The Federal

Reserve Bank of San Francisco found that the ease businesses could get finance due to low-

interest rates contributed to the boom known as the "Dotcom Bubble.

The Great Depression of the 1930s

The Great Depression was a severe worldwide economic crisis that lasted from 1929 to

1939. It was the longest and most

profound economic depression in the

modern world, affecting not only the

United States but also the economies

of Europe and other parts of the

world (Sogani). The Great

Depression was caused by a complex

set of factors, including the stock market crash, bank failures, overproduction, and unequal

distribution of wealth, among others.

The 1929 stock market collapse was a major factor in the Great Depression. Investors

panicked and dumped their stock holdings due to the fall, lowering prices. The ensuing drop in
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stock prices destroyed billions of dollars worth of wealth. The bankruptcy of many banks was

directly attributable to the fact that many investors who had borrowed money to purchase stocks

could not return their debts.

There was a domino effect on the economy as a whole from the stock market disaster.

There was a drop in aggregate demand because many companies and people who had invested in

the stock market lost money and therefore cut down on spending. Because of this fall in demand,

overproduction, and uneven income distribution, the economy shrank, unemployment rose, and

poverty increased. There was a delay in the government's reaction, and the Federal Reserve's

actions didn't help stabilize the financial sector, so the crisis only became worse. A global slump

resulted from the government's inaction as the economic crisis deepened and extended to other

nations.

During the Great Depression, the collapse of banks was a major factor in the escalation of

the crisis. People lost faith in the financial system due to bank failures because they saw their life

savings disappear. People started taking their money out of banks, further decreasing bank

deposits and shrinking the money supply (Naser). Reduced access to credit for firms and higher

consumer prices led to less spending and more unemployment due to the tightening money

supply. The Federal Reserve, the agency in charge of banking regulation, reacted slowly to these

bank collapses. To avoid more bank collapses, the Federal Reserve did not take significant action

to pump liquidity into the financial sector. Because of this delay in effective action, the Great

Depression became far more severe and lasted much longer than it otherwise would have.

Bernstein suggests that widespread overproduction contributed to the Great Depression.

Production in several sectors, including agriculture, mining, and manufacturing, rose sharply in
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the years before the Great Depression. The advent of the assembly line and other mass

production methods allowed for a dramatic rise in output, which in turn fueled economic growth.

However, the glut of commodities brought about by this overproduction led to falling

prices. As a result, both profitability and investment fell for businesses. Companies reduced

output, reducing employment and slowing the economy even more. Bernstein claims the

overproduction crisis worsened because many people and organizations amassed wealth and

income. Because of the narrowing of the middle class, fewer people could buy manufactured

products.

There was also a lack of oversight in the financial industry, which encouraged excessive

speculation and dangerous investments. The economic downturn that began with the stock

market collapse of 1929 was just the beginning.

The 1997 financial crisis in Korea

In the 1990s, Korea faced a deteriorating current account balance due to inflation, the

appreciation of the Korean

won, and the global recession.

The government encouraged

capital inflows through limited

capital account liberalization to

finance the growing current

account deficits. However, policymakers overlooked the resulting financial instability due to

concerns about the competitiveness of Korean exports through the appreciation of the Korean

won. The Korean government declared the liberalization of the financial sector in 1993, which

resulted in removing regulatory constraints on financial institutions. Insufficient prudential

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regulation led to a rise in financial institutions' short-term foreign currency debts. Furthermore,

the government has undertaken additional measures to deregulate the financial sector and open

up the capital market in accordance with the prerequisites for OECD membership. However, it

has prioritized the liberalization of short-term capital inflows over long-term ones.

Long-term foreign borrowing was discouraged by strict disclosure requirements, but

trade-related short-term borrowing was exempt from government oversight. Because of this, in

1996, short-term external loans made up 61% of the banking sector's total external obligations,

encouraging banks and companies to fund long-term projects with overseas borrowing.

Large current account imbalances caused the crisis. The nation's trade deficit generated a

severe foreign currency shortage. Korean companies and banks struggled to repay abroad debts

due to a cash shortage. Korea's economy was also vulnerable to global financial market shifts

due to its dependence on foreign borrowing to support imports (Eichengreen). The win dropped,

and foreign currency became scarce as international investors lost trust in the Korean economy

and pulled their money out. Korean companies and banks struggled to meet international

commitments as the currency weakened.

South Korea's inadequate financial regulation and supervision contributed to its financial

disaster. By letting banks and corporations take needless financial risks. Lax monitoring and

control enabled Korea's financial institutions to assume undue risk. Financial institutions could

lend without collateral, and firms might borrow large amounts without considering payback. This

tendency caused unsustainable debt levels and a wave of bankruptcies and defaults.

Bailouts and subsidies for failing businesses worsened the crisis. Eichengreen argues that

these measures created a moral hazard by encouraging banks and companies to take the
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excessive risk knowing the government would bail them out if things went wrong. Loan and

borrowing recklessness brought down the banking system.

Last, investors betting against the Korean won. Thus, the currency fell (Koo and Sherry).

Korean banks and companies had to change won into foreign currency to meet international

commitments, which cost more. As the won fell, Korean exports cost more than those of other

nations, making it tougher for Korean enterprises to compete abroad. Currency speculation

caused the crisis because of concern that the Korean economy was too reliant on short-term

foreign borrowing and too vulnerable to global financial market swings.

Conclusion

A wide range of circumstances may cause economic crises. Systemic breakdowns, such

as those experienced by the banking system or other financial institutions, may precipitate a

severe economic downturn. Natural calamities like pandemic viruses may cause economic

difficulties by interrupting global supply networks and leading to widespread company closures.

Weak financial rules and monitoring may encourage banks and firms to take unnecessary risks,

leading to an unmanageable level of debt. Economic downturns may be caused by a number of

circumstances, including unforeseen actions on the part of individuals. This may involve actions

like excessive greed and speculation that fuel market bubbles and eventually burst. Uncertainty

and a lack of investor confidence may also be caused by other human actions, such as political

instability and corruption, which can lead to economic disasters.

Examining past instances of economic difficulties is crucial for understanding the debates

and divergences of opinion among professionals over the patterns and causes of economic crises.

For instance, the Greek government-debt crisis was brought on by a number of causes, the most

prominent of which were the country's wasteful expenditure, ineffective tax collection methods,
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and dependence on short-term borrowing. The COVID-19 pandemic triggered inflation due to

supply chain interruptions, higher consumer demand, and government stimulus expenditure.

When investors learned that many dotcom enterprises were not profitable, the speculative market

bubble known as the "Dotcom Bubble" burst. Large current account deficit, lax banking laws,

and government assistance that induced moral hazard all contributed to the financial crisis that

hit Korea in 1997. A number of interconnected causes contributed to the deterioration of the

economy during the Great Depression of the 1930s. These included the collapse of the stock

market, banks' failure, and credit tightening.

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