Data 5 – banks and finance
Charts and maps all about crises and crashes. Each of the visualisations below are interactive – hover over them to reveal more detail and dig deeper.
How regular are crashes? Unfortunately, they are very regular. Crises and crashes can seem inevitable in a complex and interconnected world – but are they really unavoidable, or could we do more to prevent them? Historically, crises have come in waves. Peaks can be seen around the collapse of the Soviet Union in the early 1990s, and the Great Depression 70 years earlier. What else stands out?
The Wall Street Crash and Great Depression
The “Roaring Twenties” were a decade of economic boom, cultural shift, and prosperity in the US. The Ford Model T became an icon of this era, with production reaching 9,000 per day in 1925. A construction boom, especially with housing, saw New York became the largest city in the world by 1926. Growing average incomes and the proliferation of consumer credit marked the rise of a consumerism culture. However, the same economic growth and consumer spending that characterised the “Roaring Twenties” also led to an unsustainable economic bubble. By the eve of the Wall Street Crash in 1929, US stocks were priced at 31 times their earnings.
On October 24th, 1929 the bubble burst. The Dow Jones Industrial Index, which measures the performance of 30 large companies on the New York Stock Exchange, plummeted from a peak of 381 in September 1929 to a low of 41 in July 1932. Use the slider to follow the path of the Dow Jones Industrial Index and see how it reflects the economic and social changes of the “Roaring Twenties” and the Great Depression.
Unemployment soared to over 20% by the mid 1930s, real wages declined and poverty was widespread. It would take 11 years and the start of the Second World War for output per person to reach its pre-crisis peak.
The Federal Reserve faced a puzzle in setting monetary policy. The price level rose sharply during World War I, as the US increased its military spending and exports to the Allies. However, post-war the US experienced a period of deflation, or a sustained decline in prices. The US could not loosen monetary policy to combat deflation, because it was on the Gold Standard, which backed the dollar with a fixed quantity of gold. When President Franklin D. Roosevelt took office in 1933, one of his first actions was to take the US off the standard, giving the country more flexibility to use monetary policy.
The Great Recession
In the 2000s, banks increasingly built assets using mortgages as an input. Residential Mortgage-Backed Securities (RMBS) are debt-based securities whose value rests on residential loans. They boomed in popularity in the 2000s as banks issued more mortgages, which were quickly sold-on to other banks and repackaged into RMBS.
When the housing market bubble burst in 2007, banks lost billions as these assets sank in value. The resulting crisis was the worst the world had seen in decades. US GDP per capita didn’t reach its pre-crisis peak until 2013. Others still haven’t — Greek GDP per capita is still a third lower.
Though it recovered more quickly, the impact on world trade was even greater. Hover over the chart below to call out different countries.
Small falls in GDP can have outsized impacts on trade volumes. Often this effect occurs as countries will run down inventories of foreign goods during unstable business climates, make cutbacks to discretionary spending, or due to large scale job losses leading to a fall in demand.
After crises, many people try to fill gaps in their spending power by taking on liabilities in the form of consumer debt. The chart below clearly shows that 2008 was a much more serious crisis when it came to American household balance sheets than the more recent Covid-related shutdowns.
To mitigate the chances of future baking crises, financial regulators have increased the proportion of bank’s assets that must be held in liquid funds. The aim is that banks will be able to weather future downturns without bailouts. The system is de-risked, in other words. What side effects could there be?