Background to the current crisis (I)

The world at the beginning of the 2nd decade of the 21st century is very different from the world in the 90s of last century.



The 'dotcom' crisis was one of the preludes of the current financial crisis.

As Lisa Simpson says in one of the episodes of this so familiar serie, "the twenty-first century is the same as the 90s, the only differences are the people now have more fear, and the stock exchanges do not have profits of that time."
Is it just that?
It is true that the context in which humanity lived in the 90s, created a huge optimism in Man, which led him to place their full confidence in the ability of progress of humanity and in the market economy. During this decade, there was a strong internationalization of the financial system, thanks to its connection to the new technologies of information and communication. The profits of financial companies grew exponentially, as well as the salaries of their executives.
The financial sector quickly became the industry "trendy", where everyone wanted to go to work, and where everyone wanted to make a career.
But, behold, enters the twenty-first century and the world knows the other side of the coin: what was once seen as the source of wealth and well-being, is now seen as the source of our disgrace.
As what usually happens before each crisis, the current crisis has been marked by the bursting of speculative bubbles, which consist of the very rapid increase in the price of a given asset.
This increase attracts numerous investors who just want to cash in on the growing trend of increase in these prices. As the current crisis, a crisis that began in the financial sector, was in the second half of the 90s that there was a large increase in stock prices in a short time. In fact, the average annual productivity growth in this sector, surrounded him with great optimism, which attracted numerous investors.

In 2000, when the share price reached its peak and growth, Robert Shiller presented the reasons for such speculation around the stock market:
- The technological revolution, as was said, allowed the globalization of the financial system;
- American hegemony and optimism, with the fall of the communist bloc and the Asian crisis;
- Development of materialistic values ​​within society, such as mass consumption;
- Republican victory in the U.S., in the interests of entrepreneurs, which led to lower taxes;
- Equity investment with the savings made ​​by the baby boom generation;
- The growing optimism about the economy, broadcast daily by the media and by financial analysts;
- The development of reform plans based on investment in the stock market;
- Growth of investment funds;
- Decrease in inflation and overly optimistic interpretation of their consequences;
- Development of mechanisms that facilitate and enhance the activity of the stock market;
- Legalization of gambling and mean decrease in risk aversion on the part of economic agents;

it seems that with this crisis, the fall was much greater than the previous!!

The question put at that time was if Shiller was right, as a possible crash soon, or if the stock price would continue in ascendancy. According to economic theory, asset prices are not determined solely by economic factors: ie, asset prices do not rely solely on the present value of these expected profits.
The period that followed the publication of Shiller's book gave him reason: the stock indexes have plummeted, but recovered well from 2002 (the index SP500 has overcome in October 2007, the best mark of 2000). Despite dissenting voices, most analysts thought the fall of 2000/02 was no foreshadowing related to a speculative bubble, but the result of economic factors. Unfortunately, who not got carried away by this irrational euphoria, was heavily damaged while the markets gave them no reason.

Since the oil crisis of the 70s, to the awakening of the current crisis in 2007, the world knew other crises, beyond the crisis of the 'dotcom':
- Stock market crash on Wall Street in 1987;
- Failure of Institutions of mortgages "Savings and loans" in the U.S. in 1989-1991;
- Crash in the stock market indices in the Japanese housing market in 1990;
- European Monetary System crisis in 1994/95;
- Asian currency crisis in 1997/98;
- Russian debt crisis in 1998;
- Failure of the American fund "Long Term Capital Managment" also in 1998;
- Argentine crisis in 2001/02;

Despite the crises have succeed to a worrisome pace for the fact that most of the world powers and the two major economic blocs in the world, U.S. and European Union have escaped virtually unscathed, contributed to the increased confidence in the resilience of the capitalist system.
Away from the strictly economic area, the capitalist system was also able to hold up reasonably well against the attacks of September 11th 2001, the expansion of terrorist activities and the invasion of Iraq and Afghanistan.
But despite the world economy has passed well in all these 'fiery trials', it remains curious that since the 80s of the twentieth century, the world has witnessed many crises in as little time as never before happened.


In the next post, I will begin by examining this phenomenon curious and troubling.