Wed Oct 15th, 2008 at 08:31:40 AM EST
Let's play economic crisis bingo. I provide a couple of quotes, and you guess which economic crisis they describe (I'll remove all direct mention of the countries and years involved so it won't be too easy).
So, without further ado:
The first act was the story of the bubble. It began, we now think, with bad banking. In all of the countries that are currently in crisis, there was a fuzzy line at best between what was public and what was private
Government guarantees on bank deposits are standard practice throughout the world, but normally these guarantees come with strings attached. The owners of banks have to meet capital requirements (that is, put a lot of their own money at risk), restrict themselves to prudent investments, and so on. In [...] however, too many people seem to have been granted privilege without responsibility, allowing them to play a game of "heads, I win, tails somebody else loses." And the loans financed highly speculative real estate ventures and wildly overambitious corporate expansion.
The bubble was inflated still further by credulous foreign investors [...] It was also, for a while, self-sustaining: All those irresponsible loans created a boom in real estate and stock markets, which made the balance sheets of banks and their clients look much healthier than they were.
The bursting had to happen sooner or later. At some point it was going to become clear that the Panglossian values [the] markets had placed on assets weren't realistic in this imperfect world
As nervous investors began to pull their money out of banks, asset prices plunged. As asset prices fell, it became increasingly doubtful whether governments would really stand behind the deposits and loans that remained, and investors fled all the faster. Foreign investors stampeded to the exits, forcing currency devaluations
[The] financial implosion is, of course, dragging the real economies down with it. Partly, that is because people feel poorer, depressing consumer demand; partly it is because low stock prices and high interest rates are depressing investment. But there is also - disturbingly - a supply-side effect. Although runaway banks were the original source of the mess, a functioning banking system remains a crucial lubricant for the economic engine. With banking in some [...] countries effectively paralyzed, that engine is showing signs of seizing up: even companies that should be profitable - like exporters - are finding themselves hamstrung by lack of credit. It is, in short, a terrible but also fascinating spectacle.
Could it get worse? If there is a third act, it will involve the interaction of economics and politics: economic crisis will lead to political instability, instability will lead to capital flight that reinforces the economic crisis, and all heck will break loose. But so far only [one country] shows even faint signs of such a new vicious circle, and even there most sensible observers think that the risks of really serious unrest have been exaggerated.