Market bubbles are linked to many historic financial crises, but asset price run-ups can reflect both fundamental value changes and psychological contagion. Using historic values of commonly held assets (stocks and real estate), a novel “exuberance index” offers a way to compare bubbles.
The collapse of trade during the financial crisis can be tied, for the most part, to a drop in demand. Less talked about, however, is the role of financing—or lack thereof.
Over the past 40 years, there have been more than 120 banking crises around the world. Different governments have responded in different ways. The gross and net costs as a percentage of GDP range wildly, anywhere from less than 1 percent to well beyond 30 percent.
Their share of the foreign investment pie grew from 0.4 percent in 1970 to 15.8 percent in 2008. What’s behind the growth?
Don’t blame trade restrictions this time. Instead, the three culprits are the credit crunch, the “compositional effect” and the trend away from making an entire product in one country.