Assessment 2 (Question 2)Introduction The past decade has witnessed a number of economic and financial crises that have affected the developed countries. In the mid of the turbulence of these crises, market participants and financial analysts have pointed out that there are going to be spillover effects that are going to affect the developing countries and this may have significant impact on the global financial markets. The developed countries are suffering from detrimental crisis especially after the depression that occurred in 2007. The beginning of the global financial crisis has been associated with the 2007 U. S.
subprime financial crisis (IMF, 2010). The element of contagion is related mainly to the periods of crisis when the elements of transmitting shocks are largely felt. The contagion can be fast and furious in the sense that it can be significant and immediate occurring in the short term when shocks are transmitted between financial markets. At the same time, the contagion can shift and significant increase in the linkages in the cross market as a result of shock being felt in one country (OECD, 2007).
World’s Financial and Economic Crises There are several financial and economic crises that have had contagious effects on other economies over the years. Some of the crises that have had great impact on world economies include: Swedish Financial Crisis of 1990 to 1994: there was a deregulation of the Swiss credit market in 1985 and this led to the bubble of commercial asset speculation. The bubble burst was observed in between 1990 and 1994 and this led to 90% of banking industry experiencing massive including the largest banks in Sweden.
The impact of the crisis was felt mainly by stakeholders as the governments bailed some banks and others were destroyed by the crisis fail. However, taxpayers did not suffer because of the government recouped losses by reselling assets and dividends (DREA, 2008). Wall Street Crush of 1929: in the late 1920s, there were several investors who made contributions to speculative bubble in the stock market. Most of the investors went into debt as they purchased stock and this led to over $8.5 billion in debt in various parts of the country.
In 1929 October 24, there was panic among the investors and this led to massive selloff and it tanked the stock market. Consequently, this contributed to the Great Depression that occurred in the 1930s. Although the Rockefeller family that headed major banks bought large volumes of stock, it did not build the confidence of the investors. Consequently, there was a $30 billion market loss – this was higher than the total costs that the U. S. had spent during WWI. The crisis led to the stock markets crushing, businesses closing, massive layoffs, and high level of bankruptcies.
The dollar also experienced international run and therefore, there was an increase in interest rates thus driving thousands of lenders out (DREA, 2008). Japanese Asset Price Bubble of 1986 to 1990: when the Second World War ended, the domestic policies of the Japanese encouraged individuals to save money. A number of people banked their money and this made it easier for companies to access loans as well as lines of credits. The yen appreciated and investors were reaping benefits in the financial markets.
In addition, the people could easily access credit to develop properties and to buy homes and this led to speculative real estate bubble. There was resultant inflation of real estate prices and there was no ceiling on stock prices but by 1990s, the bubble started sinking. As a result, there was a decrease in estate and stock values. Investments were made in other countries but investors across the globe who had invested in Japan were affected and companies lost competitive advantage on global scale (DREA, 2008).