Financial markets have become one of the most important areas of economic activities in developed countries. Trillions of dollars are traded on these markets and financial risks are diversified to a larger pool of investors than ever before. The benefits of these highly lucrative and sophisticated markets are overshadowed from time to time by spectacular crashes and crises. Many times, the financial markets have the capacity to regenerate and continue as if very little happened. Some other times, the crashes lead to crises and the crises spill over to the real economy. When that happens, there is a wave of criticism against banks and financial markets and a new wave of regulatory legislation is passed to fix the situation such that these crises should never occur in the future. Yet, in spite of increased regulation crises seem to recur again and again. Crises seem to be different every time and there is no regularity as such, although problems seem to recur in certain asset classes such as real estate. The equity crash of 1987 was followed by the fall of the sterling pound in 1992, then the Asian crisis of 1997 and the Russian default of 1998 that led to the collapse of Long-Term Capital Management (LTCM), the first gigantic hedge fund. Then we had the dot.com crisis at the beginning of the 2000s and finally the series of crises that started in 2007. One regularity suggests itself: when severe banking problems are involved, the real economic consequences tend to be bigger and more enduring. At the time of publication of this book we are confronted with very low, even negative interest rates, stagnation, deflationary pressures in some regions, political risks and Brexit. These can hardly be called normal times, and are to a large extent a legacy of the most recent crises. The future looks perhaps even too interesting for academics, and anxiety has been spreading out in many places. This may be the beginning of a new realism in finance and banking and many of the old norms may need to be reconsidered. © Cambridge University Press 2017.
|Title of host publication||Preparing for the Next Financial Crisis: Policies, Tools and Models|
|Editors||Esa Jokivuolle, Radu Tunaru|
|Publisher||Cambridge University Press|
|Number of pages||7|
|Publication status||Published - 2017|
|MoE publication type||A3 Part of a book or another research book|