The economic turmoil sweeping across the world has created a bunch of myths. Among the more popular ones is that capitalism is dead, or its flipside that because governments are intervening they have turned socialists. This arises from another myth that the current crisis is a rare occurrence and aberration in an otherwise smooth path of progress.
This is far from the truth. Since 1970 in the past 38 years there have been 395 events of banking, currency or debt crises in 161 countries. Of these, 124 have been banking crises, 208 currency crises and 63 have been debt defaults. Many countries have suffered from some form of crisis several times, while others have seen all three types in quick type succession. This startling data has been revealed in a working paper commissioned by the international Monetary Fund (IMF), which has been in the thick of action in most of these crises.
According to the study, a banking crisis is one in which there is a run on the banks worried depositors start withdrawing their money so fast that the bank is unable to honor its commitment. A currency crisis is one where the value of a currency drastically falls. Debt defaults are those where a country is unable to repay its debt. All three types of crises are countrywide or may occur in several countries at a time.
There were 42 cases of a twin crisis banking and currency occurring together and 10 cases of triple crisis when all three types happen together. Banking crises were common in the 1990s, 1995 being the high point with 13 events. Currency crises were common in the first halves of the 1980s and 1990s. Sovereign debt defaults were most common in the 1980s.
There are some features that distinguish the currently unfolding crisis from past ones. It is much bigger, mainly since it is spreading out from the global economic nerve the US. Most earlier crises took place in third world countries with the Western countries (IMF) moving in to tackle the aftermath This time round, it is the richest countries that are staring into an abyss.
The financial system too has become more complex and integrated in the past 15 years, as can be seen from the fact that US mortgage defaults are bringing down giant banks in Europe and elsewhere. Due to this scale and depth, the banking crisis is bringing in its wake a recession which will cast a shadow over the whole world.
Wile the earlier crises hit mostly third world countries in Africa, Latin America and Asia, the present crisis has moved to the center of metropolitan finance to North America and Europe.
The IMF study out 42 of these crises, affecting 37 countries, under the scanner to find out what kind of rescue efforts is usually taken. The results dispose off the other myth that government intervention is smoothing new or unusual.
Injection of cash into the finance system and guaranteeing bank deposits were the two most common measures adopted by governments to limit the crisis.
In over 71% of cases, government infused liquidity into the financial system, and in 30% of the cases, it also undertook to protect bank deposits by standing guarantee.
So, far from being a rare event, the current economic turmoil appears to be fairly standard occurrence. Except that this one is gigantic and nobody knows how far it will go.