Thursday, February 26, 2009

Top 10: Financial Crises

Top 10: Financial Crises

These 10 disasters all gave rise to widespread pandemonium and all starred that most slippery of tricksters: money.

By Ross Bonander, Entertainment Correspondent
Page 1: Financial crises

Stock market crash - Credit: Fotolia

Whether or not Karl Marx, the archenemy of wealth, ever compared money to evil, I do not know. He did, however, write about what he felt was money’s most intriguing quality: its ability to turn everything into its contrary. For example, if you’re ugly but rich, you can buy the most beautiful women; thus, money negates or flip-flops the very quality that should repel those women. On whom or what precisely this point reflects most poorly -- cash or chicks -- is for someone else to figure out. In the meantime, what follows is a century’s worth of financial crises, starring that most slippery of trickster characters, money.
Number 10
The Panic of 1907

The fourth so-called ”panic” in 34 years, the Panic of 1907 was brought about by the usual suspects: overexpansion and poor speculation. The stock market crashed in March, and a second crash in October led to a run on banks and every trust in New York, notably causing the massive National Bank of North America to fail. The U.S. Treasury department -- with exceptional help from J.P. Morgan and some select executives -- raced in with federal money and some creative financial ”redirection.” Confidence in the market had been restored by February 1908, and in May, Congress passed the Aldrich-Vreeland Act, which created the National Monetary Commission that later recommended the Federal Reserve Act in an effort to squash any future panics before they were able to do such tremendous damage to the economy.
Number 9
El Error de Diciembre - 1994

Also known as the Mexican Peso Crisis, this title is not a reference to the ”girl” you hooked up with during some poorly recalled winter vacation in Mazatlan. Rather, “The December Mistake” stems from the incoming Mexican government’s pressing need to correct some monumental mistakes left behind by its outgoing administration.

The year leading up to the “Mistake” featured enough turmoil to make any investor more than a little shy: A rebel uprising in Chiapas, rumors of corruption at the highest levels of government and a pair of political assassinations a few months apart, to name a few. Incoming President Ernesto Zedillo’s administration saw no choice but to devalue the peso; a move that caused cash to flee the country so quickly and so dramatically that the government itself nearly defaulted.
Number 8
Argentine economic crisis - 1999

The 1980s were a difficult time for Argentina: military dictatorship, the Falklands debacle, economic collapse, and massive inflation. Their debt grew throughout the 1990s and, coupled with corruption, the country landed in a full-blown recession by 1999 -- one it couldn’t seem to counter with economic policy. True to form, investors lost confidence, and a drastic run on banks forced the government to freeze bank accounts for a full year, permitting only meager withdrawals. Demonstrations were followed by violent riots and the eventual fall of Fernando de la Rúa’s government. The next two administrations failed to right the ship, as countless public and private companies filed for or came close to filing for bankruptcy. A third administration, led by Nestor Kirchner, finally succeeded in stabilizing the economy.

If you have no money, is it a good idea to print more?
Page 2: Financial collapse

New York Stock Exchange - Credit: UPI
Number 7
German hyperinflation - 1918-24

In 1914, the exchange rate between the U.S. dollar and the German Mark was about 1 to 4. By 1923, the rate had mushroomed to $1 to 1 trillion Marks. Ordinarily, the idea of having so much cash that you have to cart it around in a wheelbarrow sounds good, but not when it hardly buys a loaf of bread.

In the aftermath of the First World War, the ”winners,” who blamed Germany for starting the war, set out to punish Germany and demanded financial retribution for the cost of the war. Unfortunately, Germany had little in the way of land, goods or precious metals to back it up, and its currency lost value by the day. What was the solution? Germany started the presses until the 1,000-billion Mark was produced. They issued the Rentenmark currency in 1923 in an effort to put the brakes on the inflation. The Rentenmark was replaced by the Reichmark in 1924. The hyperinflation came to an end, but not before embittering a generation of Germans and one especially surly über racist from Austria.
Number 6
Souk Al-Manakh - 1982

Could something as simple as postdated checks crush an economy? It’s never that simple, but it’s close enough for our purposes.

Kuwait’s Souk Al-Manakh stock market was an alternative market and not quite legal, especially next to the country’s official market. However, many new investors had little access to the legal market, which was largely controlled by old money, and began investing in the Souk Al-Manakh. Shares were being dealt heavily by postdated checks; an act that created a castle in the clouds that was quick to collapse. Thousands of investors held unregulated credit in the form of postdated or outstanding checks that amounted to about $94 billion. In truth, the money was never there and only two banks (one commercial) survived the crash. The Kuwaiti government stepped in and had barely begun to turn things around when Iraq invaded the country in 1990. On a brighter note, in today’s currency market, the Kuwaiti Dinar holds a higher value than any other national currency.
Number 5
Black Monday - 1987

Why Monday October 19, 1987? Why a massive stock market crash? How did $500 billion from the NYSE disappear into thin air? Many years later, no clear answers exist, largely because there were so few indicators that it was even coming. Whatever the cause, world markets took it in the gut: By the end of October 1987, the Australian market fell 41.8%, Canada’s plunged 22.5%, the United Kingdom’s fell 26.4%, and Hong Kong’s dropped a ridiculous 45.8%. One popular theory ascribes the crash to instant program trading and the growing influence of computers on Wall Street, but that debate rages. What is certain is that lots of people went broke very, very quickly.
Number 4
Russian financial crisis - 1998

Stricken by corruption, lacking an effective economic reform policy, devaluation of the ruble, and political instability sent Russia into a massive financial crisis as the millennium came to a close. Additionally, as the exporter of one-third of the world’s oil and natural gas reserves, Russia was hit even harder when those prices dropped. When foreign investors pulled their money out of the country, the banks were crippled to such an extent that even an IMF loan was largely ineffective. The crisis stung countries like Ukraine and the Czech Republic and directly hit the Dow, which suffered one of its biggest point drops in history.

Black Tuesday and an embargo on black gold top this list…
Page 3: Stock market crashes

Oil crisis - Credit: UPI
Number 3
East Asian financial crisis - 1997

The so-called “Asian economic miracle” turned disastrous in July 1997 when investors did what they do so well: lost confidence, particularly in currencies. High yield rates made Asian markets appealing, but when the U.S. tried to stem their own recession by lowering interest rates, they made themselves more attractive and, as a consequence, the Asian markets looked too risky. A domino effect followed, beginning in Thailand and spreading through the Philippines, Hong Kong, Indonesia, Malaysia and beyond, triggering an unprecedented global crisis. Asian markets that had enjoyed some rare prosperity were slammed: Thailand dipped 75%; Hong Kong’s HSI, 23%; and Singapore, 60%. Not a single global market went untouched.
Number 2
Black Tuesday - 1929

On October 29, 1929, $10 billion (around $95 billion today) turned to dust. Sounds more like a Tuesday in the red, but history has stamped it black.

In the years leading up to Black Tuesday, the Dow was turning countless men into millionaires. The market became a hobby for many ignorant investors who knew nothing about how the market worked, but they still readily poured all their money into the stocks of companies (many of which were fraudulent) that they knew nothing about.

When the government stepped in to try and cool things down by raising interest rates, panic ensued. Investors were desperate to liquidate their stocks, but the money was an illusion that created instant and unimaginable poverty. Unfortunately, banks also invested in stocks and the panic led to a run on those banks that reduced many to insolvency and failure. The country was thrust into the Great Depression, and much of the world followed. Unsurprisingly, a war was needed to return many of these countries to some semblance of economic prosperity.

As an aside, one wealthy investor who pulled out of the market before it collapsed was Joseph Kennedy, father to JFK, RFK and Teddy. We can only imagine how different the American political landscape may have been if Joseph didn’t get out early; perhaps the family compound would have been located in a dusty Hooverville, and not swanky Hyannisport.
Number 1
1973 Oil Crisis

After years of getting reamed by the West for its oil, the modest members of OPEC got wise: In the midst of the Yom Kippur war between Syria and Egypt against Israel, OPEC employed oil as a weapon with the Arab Oil Embargo against those who supported Israel. Crude oil costs rose while production was cut, specifically to the U.S. and the Netherlands. The embargo lasted only five months, but the affects continue today: OPEC member states realized a level of wealth unfathomable only years before; in six weeks shares on the NYSE lost $97 billion in value; Japanese car makers began to counter the American-made gas guzzlers with smaller cars, giving them a tremendous market share; the U.S. enacted a 55-mph speed limit in an effort to conserve oil; and, in 1977, President Carter created the Department of Energy, which promptly developed the U.S.’s strategic petroleum reserve (tapped George W. Bush when the price of oil skyrocketed).
rockin’ the stocks

Returning to Marx, the contrary quality of money he described in The Economic and Philosophic Manuscripts was not so much on display in the previous crises as money’s more frightening capacity to disappear in the blink of an eye. When there’s no money, the old barter system becomes more appealing by the second.

Resources: - Panic of 1907 - Mexican peso crisis - Argentine economic crisis - Souk Al-Manakh - Black Monday - Russian financial crisis - Asian financial crisis - Black Tuesday - 1973 Oil Crisis

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