There have been four waves of financial crisis in the last thirty years involving more than forty countries. One unique feature is that every currency crisis has been associated with a banking crisis and ninety percent of the banking crises have been associated with a currency crisis. The pattern in the data is that each of these countries has experienced an economic boom in the several years prior to the crisis; each also has experienced an investment inflow, which has led to an increase in the price of securities and an increase in the price of its currency, unless this price has been pegged.
In each of these episodes the indebtedness of the borrowers is increasing at rates much faster than their incomes and than the interest payments on the indebtedness. Moreover the external indebtedness of the countries is increasing more rapidly than their GDPs and than the interest payments on their indebtedness. Both the borrowers and the countries are on non-sustainable trajectories. The puzzle is that the lenders ignore that the borrowers are on a non-sustainable trajectory; they extend credit at an accelerating rate. Moreover the regulatory community–the central banks, the bank regulators, the stock market analysts, the credit rating agencies, the International Monetary Fund, the Organization of Economic Cooperation and Development–also fail to recognize that the end game for the growth of credit is a financial crisis.
On March 26, Professor Robert Aliber discussed his own theories about the sources of financial crises, outlining a number of guiding questions and supporting arguments. It was Aliber’s fourth time speaking at the Center in Beijing.
Robert Z. Aliber, (BA, Williams College 1952; BA, Cambridge University 1954; MA, Cambridge University 1957; PhD, Yale University 1962) is Professor Emeritus of International Economics and Finance at the University of Chicago Booth School of Business. He has written extensively about exchange rates, and international financial and banking relationships and policy problems. He co-authored MANIAS, PANICS, and CRASHES – A History of Financial Crises.