Economic debacles may be classified by their source: market or finance. A market-based recession occurs via an arresting disequilibrium between supply and demand which is reflected in prices. A market recession may evolve through the typical business cycle, come as a consternation in market conditions, or surface from government missteps in fiddling with the gears of an economy.
Market contractions never evolve into depressions, as markets gradually adjust to a new normal via price acclimation. The oil shocks of the 1970s were a sudden spike in petroleum prices which sent economies spiraling down. The recessions following the jolts were short-lived.
Downfalls from financial panics are an altogether distinct species from market contractions.
How much do all those exotic securities, and the institutions that create them, buy them, and sell them, actually contribute to the ‘real’ economy that provides us with goods and services, now and for the future? ~ American economist Robert Solow
The money parade is solely guided by the expectation of liquidity. Speculators put their money in. When the prospects of getting their money out sour, speculators panic, causing a crash through herd behavior.
Recurrent descent into insanity is not a wholly attractive feature of capitalism. ~ John Kenneth Galbraith
Financial transfers are based upon trust rather than exchange of trade. A financial shock stabs sense of surety about liquidity, making lenders and investors skittish. Through the rumor mill by which the wealth herd invariably operates, discombobulation in confidence can linger for extended periods. After all, speculative funds are a surplus for the wealthy who hold a hoard of lucre: better safe than sorry.
Though some financial falls have been short-lived spasms of fright, recessions from pecuniary panics have often had a more crippling impact on the economic gyre than market contractions. A speculative panic is a criticality event that can cascade into a systemic breakdown in money flow, which may create a monetary morass that lingers for years.
In the US, financial crises have occurred in: 1785–1788, 1789–1793, 1796–1799, 1815–1821, 1825–1826, 1837–1843, 1857–1858, 1860–1861, 1869, 1873–1879, 1884, 1890–1891, 1893–1897, 1901, 1907, 1910–1911, 1930–1933, 1937, 1973, 1987–1991, 2001, and 2008–2010. All these plunges stemmed from speculative booms, fueled by intensely concentrated wealth.
By contrast, market contractions transpired in: 1802–1804, 1812, 1822–1823, 1833–1834, 1845–1846, 1853–1854, 1869–1870, 1882–1885, 1902–1904, 1913–1914, 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1945, 1973–1975, 1981–1982.
(These were business-based recessions not caused by political interference. Calamities caused by the government monkeying with interest rates or the money supply, or via trade restrictions, happened in 1807, 1828–1829, 1945, 1949, 1958, 1960–1961, 1969–1970, and 1980.)
Almost all financial crises were assisted by governmental ineptness. Even now, governments simply do not know how to sensibly regulate economic animal spirits, sphincter speculative fever, nor clean up the aftermath mess.
There is an equally important takeaway about the dance between investors and government: that governments have had to regularly intervene in private financial affairs shows how broken the regime of capitalism is, especially its proclivity to concentrate wealth at societal expense.
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Indeed, financial crises and bailouts are a regular feature of the market economy. ~ American economist Joseph Stiglitz
Because they are lynchpins to economic vitality, and so too-big-to-fail, participant financial institutions are bailed out rather than held accountable. Banks take the risk and taxpayers foot the bill when investors’ drunken reverie collapses.
Countries and regions around the world have suffered their own recessionary roller coasters for much the same reasons as the US, as well as being in on the downturns which engulf all. For instance, the Panic of 1825 arose from the Bank of England’s and others’ speculations in Latin America, including a hoax involving the imaginary country of Poyais, perpetrated by Scotsman Gregor MacGregor. The financial contagion spread throughout Europe and to the United States, as well as dunning Latin America.