1. Introduction “The classic account of financial contagions presents a standard pattern in which speculative fevers are caused by the appearance of new, unusually profitable investment opportunities”  what if one replaces “unusually profitable investment opportunities” with “subprimes” ?

2. Defining crises  how does a crisis work? (a) a new product appears (b) prices of the “new product” go up to unsustainable peaks (c) panic follows as investors sell assets, beginning with the “new product” (d) later passing to anything similar

3. Defining crises  factors fostering/preventing the spread of a crisis:  capital mobility  fixed currency exchange rates  financial regulation  types of crises:  banking crises  currency crises

4. Rules and solutions to prevent or stop crises  a relation between interpreting and solving crises  needing a “lender of last resource”  example: a central bank injecting liquidity  fighting moral hazard with rules  let the market go and learn the lesson

5. Rules and solutions to prevent or stop crises  solutions should consider the type of crisis and the players concerned  lender of last resource:  usefull if economies involved are solid  useless if economies involved are weak  rules against moral hazard:  usefull if economies involved are weak  useless if economies involved are strong

6. Crises propagation: interdependance vs contagion  crises may spread in two ways: (a) interdependence (b) contagion  interdependence  crisis naturally spreads to markets that are integrated  price correlation of financial products in different markets is mostly determined by this integration

7. Crises propagation: interdependance vs contagion  contagion  requires the involvement of loosely integrated economies  determines a faster and broader spread of the crisis  price correlation overcomes any possible statistical distorsion

8. Financial crises, an historical overview  looking for contagion in the historical record, from 1637 to 1997  evidence needed is  rates correlation (covariance) among different markets,  and different products: (short terms bank loans, bonds, equities …)  seeking for the lessons learned

9. The first crisis: Amsterdam’s tulip mania (1636-1637)  1636-37, a “frenzy” determined by a new product: bulbs from China  no contagion, and almost no propagation  lessons learned: promoting lasting financial innovation

10. Two 18th century bubbles: Mississippi and South Sea  1719-20, speculation on shares of chartered joint-stock companies  financial and monetary contagion of England, France and Amsterdam  lessons learned vary:  English boom of financial capitalism  France step-back and Amsterdam decline

11. The first Latin American debt crisis (1825)  1825, a crisis caused by default of (some) Latin American countries  1820 Latin American bonds are more profitable than UK obligations  a first flop on London market in 1825  followed by peaks in the fixing for unreliable countries (Peru, Chile)  and a crash in 1828

12. The first Latin American debt crisis (1825)  evidence of no contagion: (a) correlation among various “latin bonds” only before 1825 (b) correlation London stock-market index stops after 1825 drop  lessons learned, in the UK:  new law on bakruptcy, and more conservative monetary, and financial policies

15. Gold standard and its impact  from 1870 the gold standard emerges  currency and financial systems are more integrated than ever before  interdependence becomes thus physiological, but what about contagion?

16. The 1873 panic: Germany and Austria  1873, a bubble based on French war reparations to Germany:  stock-market collapse in Berlin and Vienna, plus contagion to Italy, Holland and USA, followed by a trade froze  from data no evidence of contagion  possibly because gold standard was not enforced

17. The first crisis in the era of the gold standard: 1890 Baring crack  spring-october 1890, a bank crisis:  Argentina’s default involves London Baring Bank and leads to a bank crisis in the USA  limited contagion (USA and Russia)  a lender of last resort and integration not yet complete  lessons learned:  coordination between central banks

18. The 1893 USA bank crisis  1893, a bank crisis that becomes a currency crisis  a frame-work of increasing pressures on the gold standard  evidence of contagion:  only in 3 out of 12 cases  shocks hit the core of the system

19. The 1907 panic  1907, lack of liquidity in NY market: (a) money for S.Francisco earthquake (b) UK denies the needed capitals (c) from NY the infection spreads in all financial centres of the world  evidence of widerange contagion  lessons learned:  saving gold for WW I ?

21. The greatest financial crisis of all (1929-1934)  before the crisis: “the five good years” (1924-1929)  gold standard return  a lower degree of protectionism  remote cause of the crisis  agricultural worldwide overproduction followed by a drop in prices

22. The greatest financial crisis of all (1929-1934)  immediate cause  october wall street crashes  from stock market to credit:  indebtment determines a lack of liquidity: “credit crunch”  from USA to Europe  a domino effect caused Europe indebtment with USA banks

23. The greatest financial crisis of all (1929-1934)  effects of the crisis  defaults in payments: (i) equities on credit, (ii) bank loans …  credit crunch  controls on capital exchange  freeze of international trade

24. The greatest financial crisis of all (1929-1934)  key-moments of a long-lasting crisis  Wall street panic, October 1929  failure of Kreditanstalt in Austria, May 1931  UK quits the gold standard, September 1931  USA dollar devaluation, May 1933

25. The greatest financial crisis of all (1929-1934)  a long-lasting crisis, a lender of last resort is lacking  a widespread crisis, determined by banking interdependence in a context of feeble financial integration  explains the paradox: no evidence of contagion

26. The greatest financial crisis of all (1929-1934)  long lasting learning from the 1929 crisis: (1) usefulness of the lender of last resource (2) a relation between crisis’ propagation and interdependence

27. The post 1929-1934 scenario  the 1930s: world is divided in trading (and financial) blocks  sterling area, reichsmark block, East- Asia …  the post WW II period: controls on capital flows (IFM, World Bank), and commodity market integration

28. The post 1929-1934 scenario  results: a stable framework in which no global financial crises occur  only currency crises locally confined  problems: USA economic policy is constrained by its leadership  the escape: the 1971 Nixon package

29. The New Financial Crises  analysis of recent crises: no evidence of contagion  the underlaying thesis: (a) interdependence not contagion (b) crises are the “tall to pay” for enjoying the benefits of integration (c) 1929-34 an unrepeatable crisis

30. The New Financial Crises  a typical pre-2008 crisis approach  after 2008, a strong revision: (1) 1929-34 is not exceptional (2) uneven income distribution fosters both crises (3) 2008 is perhaps the last episode of a long lasting bubble (at least from 2001)