Complexity and Crisis in the Financial System Critical Perspectives on the Evolution of American and British Banking
Critical Perspectives on the Evolution of American and British Banking
Edited by Matthew Hollow, Folarin Akinbami and Ranald Michie
Chapter 13: Financial crises and disaster management
AbstractThis chapter argues that ‘financial crisis’ is a subset of a broader category of disaster encompassing costly events from hurricanes and earthquakes to wars and economic depressions. It contends that the term crisis should be used to refer to the period of challenge preceding and accompanying a disaster rather than to the disaster itself. If there is a creative response to the crisis, it may be possible to avert or at least cushion the disaster proper. In the discipline of disaster studies, a framework called the disaster management cycle was developed in the 1970s to distinguish between the stages preceding, during and following natural disasters. Such disasters often recur, hence the cyclical approach. There are parallels in economics where Minsky and Kindleberger argued that swings in sentiment lead to a recurring process of boom and bust. The chapter applies the disaster cycle framework to the analysis of the Great Depression of the 1930s and the Global Financial Crisis of the early twenty-first century. Economic actors, including policymakers, were confronted by similar challenges at comparable stages of each disaster. At each stage, there was information to assess and decisions to make. Decision-makers were hindered by the incompleteness of that information as well as by their emotions. They did somewhat better during the GFC, at least in the Anglophone world, because they knew the lessons of the 1930s. The disaster cycle shows that, in essence, disasters in the financial arena have much in common with those in the natural world.
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