Understanding Systemic Risk in Global Financial Markets

CHAPTER 16Conclusion: Looking Ahead

In this book, we have presented a detailed history of some of the numerous financial crises that have occurred over many centuries. For example, we discussed one of the first well-documented events from the early 1600s, referred to as the Dutch Tulip Crisis, as well as the South Street Sea Bubble, which gripped Europe in the 1700s. These events were only precursors to the Great Depression in the late 1920s and 1930s and the Credit Crisis of 2007–2009, arguably the two worst global financial crises ever. In Chapters 1 and 2 we discussed in detail some of the key drivers that fueled the Credit Crisis, as well as many of the crises in modern history. For example, while bank failures have occurred for centuries, the volume of bank failures during the past 40 years or so has been considerably higher than in previous decades. Between 1970 and 2011 there were 147 episodes of banking crises around the globe, and the costs to society have been substantial. In addition to banking-related crises, we highlighted some of the other common drivers of systemic events throughout history:

• Bursting of asset bubbles
• Speculative manias
• Sovereign defaults
• International contagion

To better understand and hopefully avoid or minimize the impact of future crises, in Chapter 4 we discussed several longstanding economic and behavior theories. Regarding the former, there are many theories that point to a so-called “easy credit” environment that often persists in the ...