Black Swan: Economic Crises, Volume II

Table of Contents

1. Frontmatter

2. Chapter 1. Introduction: Models Related to the Contagion of Financial Crises

   Bernur Açıkgöz

   Abstract

   Economic crises are times of disaster in which the results of economic mistakes made by governments reflect on the people. Although economic crises are seen as opportunities in some cases, they have created a burden for the people. Some economic crises even triggered the World War. A recent example, Adolf Hitler, was seen as a hope of salvation in Germany due to the Great Depression and was brought to power. The second volume of the book series of the Black Swan: Economic Crises (1634–2020) will discuss, all financial and economic crises of the twentieth century in detail after the introductory chapter on the Models Related to the Contagion of Financial Crises. This chapter will initially discuss Models Related to the Contagion of Financial Crises, namely “contagion” and “negative spillover” effects to better understand all the financial, fiscal, and economic crises in 20th-century world history. With globalization in the twentieth century, economic and financial problems in a country or a region spread from the banking system to the real economy at a disastrous rate and affect global financial stability. Economists define this phenomenon by using the terms “contagion” and “negative spillover”. The financial crises of the twentieth century revealed the impact of the risk of contagion on the economy, acting like an extremely dangerous virus that contaminates all cells in the body.

3. Chapter 2. Great Economic Depression of 1929: First Global Economic Crisis

   Mesut Ardan

   Abstract

   The great economic depression of 1929, which is one of the most important economic crises ever in the history of the world economy and continued its effects for decades, first appeared in the United States of America and caused some economic, sociological, and political consequences by affecting almost the whole world. It would not be wrong to attribute the causes of the great depression that emerged in 1929 to the economic developments and policies in the United States. To put it more clearly, the stock market crash because of speculative and credit purchases, the decrease in consumption compared to overproduction, abundance of money, declining trust in the economy and bank panics, inexperienced economy management, applied customs tariffs caused the crisis. The practices of other world countries deepened the crisis and turned it into a world economic depression. This chapter aims to give detailed information about the great economic depression of 1929, which has an important place in the history of the world economy and has led to the emergence of a new economic approach. The historical development of the Great Depression, the reasons for its emergence, its effects on the selected countries in various ways, the changes in the economic policies, and the strategies of selected countries implemented to exit the Great Depression constitute the main parts of the study. Pre-depression and post-depression economic data of both the USA and selected countries are incorporated to reveal the historical development of the Great Depression, the reasons for its emergence and its consequences. Thus, the effects of the Great Depression on world economies were explained through data such as unemployment, growth, interest rates, trade volume. In many countries, with the Great Depression, the gross domestic product fell at high rates, the world trade volume decreased significantly, and unemployment rate increased. The effects of crisis lasted for years, and it took a long time to recover. The Great Depression also played an important role in the political structures and economic policies of the countries. The classical economic approach, which was accepted until the Great Depression, has been replaced by the Keynesian economic approach. The new approach that foresees direct state intervention in the economy influences the world economy for about 40 years after the Great Depression. The negative effects of the Great Depression were tried to be eliminated by applying exit strategies from the crisis within the framework of Keynesian economic policies in both the USA and other countries.

4. Chapter 3. 1973 Oil Crisis: An Economic Illness-Stagflation!

   Abdulcelil Gazioğlu

   Abstract

   The 1973 oil crisis marked a significant global economic downturn with simultaneous stagnation and inflation, a condition known as stagflation. This essay explores the factors leading to the crisis, its global impact, and the policies implemented to mitigate its effects. Drawing parallels with the Great Depression of 1929, it examines the emergence of a new economic understanding in response to the 1973 crisis. The Arab-Israeli war played a pivotal role in deepening the crisis, as tensions escalated between the Arab countries and the Western world. The study analyzes the macroeconomic indicators of affected countries and delves into the political factors that exacerbated the crisis. Additionally, it highlights the concept of stagflation and its impact on the global economy. By examining growth, inflation, and unemployment rates in developed countries, the essay illustrates the profound effects of the oil crisis on their economies. Through data analysis and historical context, this study provides insights into the 1973 oil crisis and its repercussions on the global economic landscape.

5. Chapter 4. Chilean Economic Crisis (82–86): Twin Crisis-Finance/Banking Crisis

   Melih Kabayel

   Abstract

   The Chilean economy was forced to pursue liberalization policies in the 1970s. The increasing public deficit along with unemployment and inflation made the Chilean economy a financial market open to global capital movements. The liberalization movement brought along financial liberalization and the Chilean financial sector, which joined the international financial markets, contributed to the economic growth process with rapid growth. However, financial liberalization made financial markets vulnerable due to rapid capital flows, leading to increased economic risks. In this context, the Chilean economy, with its fragile-unregulated banking sector and its transactions in financial markets, faced due to rapid money outflows in the medium and short term, leading to a financial-based banking crisis. The Chilean Twin Crisis highlighted the need for financial liberalization to be regulated, limited or supervised by high-level national actors such as the central bank. In this context, the study analyses the Chilean Twin Crisis together with its historical economic indicators and explains the effects of the economic-fiscal policies and economic developments.

6. Chapter 5. Stock Market Crash of 1987: Black Monday

   Doğancan Akata

   Abstract

   The research subject is the crisis in the DJIA on 19 October 1987 and its impact on financial markets. The research aims to explain the technical reasons underlying this stock market crisis and evaluate the effectiveness of the measures taken after the crisis. The main line of the research is as follows: Definitions, the reasons that led to the collapse of the DJIA, the causes of the crisis and the measures taken after the crisis. Black Monday is the first test for the financial markets due to the technological development of the market and the first major crisis that occurred after the transition to a computer-based system. It is of great importance to see the shortcomings of the market. In addition, the successful policies of the FED and the establishment of an environment of trust are important in overcoming the crisis with the most minor damage.

7. Chapter 6. Mexican Tequila Crisis of 1994

   Muhammet Kaya, Göksel Çetinkol

   Abstract

   The Mexican Peso Crisis, also known as the Tequila Crisis, is an important lesson especially for developing countries about the sustainability of large current account deficits and the risks of sudden changes in capital flows. Although the Mexican economy has gained a certain momentum with the effect of financial liberalization policies, which have been widely applied since the 1980s, the increasing import volume has increased the need for foreign exchange with the abandonment of import substitution policies since 1986. When the decrease in national savings is added to the increasing need for foreign exchange, the country’s current account deficit has reached significant dimensions. With the policies implemented to encourage foreign capital inflows and to borrow more easily from foreign markets, the real exchange rate was allowed to overvalue, and the country’s external debt management weakened, and in 1994, one of the first major currency crises in the South American continent was experienced.

8. Chapter 7. 1994 Financial Crisis in Turkey

   Mesut Ardan

   Abstract

   One of the deepest crises Turkey experienced in the 90s was the 1994 Economic Crisis. The crisis did not arise out of nowhere. Its roots date back to 1980. The mistakes made in some of the policies that started to be implemented with January 24, 1980, stabilization program, the seeds of the 1994 economic crisis began to be planted. Financial liberalization and liberalization in foreign trade in the following period resulted in the Turkish economy, which was not yet ready, to face a crisis. This chapter aims to give detailed information about the 1994 Economic Crisis that occurred in Turkey. In the study, the place of the 1994 economic crisis in the literature and the reasons for its emergence were tried to be explained in detail. With the onset of the crisis, its effects on the country's economy were revealed, and the exit strategy from the crisis was explained. While explaining the causes and effects of the crisis, some economic indicator figures before and after the crisis were used. In this context, data sets such as growth, foreign trade, interest rate, international reserve amount, foreign capital inflow and outflow figures, inflation, and exchange rate were used for certain periods between 1980–1994. Although there are many factors that led to the 1994 economic crisis, each one has a different effect and cannot be said to have caused the crisis on its own. Intense short-term speculative capital inflows to the capital markets with the financial liberalization, the deterioration of the current account balance as a result of the overvaluation of the Turkish lira, the unsustainable level of public deficits, high inflation, excessive public debt and public sector borrowing requirement, attempt to keep treasury borrowing rates below market rates, open positions of banks, decrease in international reserves of the Central Bank, borrowing from the Central Bank to finance public deficits can be counted among the main causes of the crisis. The 1994 economic crisis, which was one of the deepest crises in the 90s, caused the country's economy to shrink by as much as 6%, the national currency to depreciate excessively, inflation to hyperinflation levels, and overnight interest rates to reach astronomical levels. As the exit strategy from the crisis, the economic decisions of April 5, 1994, were announced, and the policies expected to eliminate the effects of the crisis in theory began to be implemented. Unfortunately, April Economic Stability Program did not provide a permanent stability and recovery in the economy and could not prevent the emergence of new economic crises in the medium and long term, because the necessary structural reforms were not fully made and implemented decisively.

9. Chapter 8. 1997 Asian Crisis

   Abdulcelil Gazioğlu

   Abstract

   Japan, which recovered its economy very quickly and well after the Second World War, posed the greatest threat to the economic hegemony of America, which was hit by political and economic crises such as the Vietnam War and oil shocks. Asian countries led by Japan, on the other hand, rose in the 1980s, when globalization accelerated rapidly and became the most important goal in all fields, and had a growth performance with almost double digits every year. This situation, also known as the Asian miracle, continued without slowing down in the 90s, so much so that those countries such as South Korea, Hong Kong, Singapore, and Taiwan, whose export share was as low as 5% in the 70s, rose above 20% in the early 90s.

10. Chapter 9. 1998 Russian Financial Crisis

    Doğancan Akata

    Abstract

    The subject of the research is the crisis that occurred in Russia in 1998 and its financial effects. The research aims to evaluate the background of the political and economic reasons for the crisis. The main line of the research: the socio-economic situation of Russia before the crisis, the factors that caused the crisis, and post-crisis developments. The establishment of a new economic system after the collapse of the Soviet Union is the most important feature of the period. Speculative capital movements and commodity price fluctuations in the 1990s were important causes of the Russian crisis. The devaluation and new import prices realized in Russia have reduced the losses of the crisis along with the revival of the industry.

11. Backmatter