Spotless Group SAS was a pan-European manufacturer of insect control and laundry products, based in Paris , France . In 2015, it became part of Germany's Henkel group.
75-489: Spotless Group was established by AXA Private Equity (renamed Ardian in 2013) in 2005, upon AXAs acquisition of French homecare company Eau Ecarlate. The incumbent CEO of Eau Ecarlate, Pierre le Tanneur, assumed the presidency of Spotless. In 2006, the second year of its existence, Spotless Group acquired Bologna -based homecare company Guaber and Irish shoe-care manufacturer Punch Industries. The group made further acquisitions in 2007, of sewerage disposal company Eparcyl and
150-507: A challenge to the epistemic norms typically assumed within financial economics and all of empirical finance. The possibility of financial crises being beyond the predictive reach of causality is discussed further within Epistemology of finance . Leverage , which means borrowing to finance investments, is frequently cited as a contributor to financial crises. When a financial institution (or an individual) only invests its own money, it can, in
225-403: A currency of at least 25% but it is also defined as at least a 10% increase in the rate of depreciation. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation . A speculative bubble (also called
300-419: A devaluation crisis, is normally considered as part of a financial crisis. Kaminsky et al. (1998), for instance, define currency crises as occurring when a weighted average of monthly percentage depreciations in the exchange rate and monthly percentage declines in exchange reserves exceeds its mean by more than three standard deviations. Frankel and Rose (1996) define a currency crisis as a nominal depreciation of
375-399: A few agents encourage others to buy too, not because the true value of the asset increases when many buy (which is called "strategic complementarity"), but because investors come to believe the true asset value is high when they observe others buying. In "herding" models, it is assumed that investors are fully rational, but only have partial information about the economy. In these models, when
450-445: A few investors buy some type of asset, this reveals that they have some positive information about that asset, which increases the rational incentive of others to buy the asset too. Even though this is a fully rational decision, it may sometimes lead to mistakenly high asset values (implying, eventually, a crash) since the first investors may, by chance, have been mistaken. Herding models, based on Complexity Science , indicate that it
525-402: A financial bubble or an economic bubble) exists in the event of large, sustained overpricing of some class of assets. One factor that frequently contributes to a bubble is the presence of buyers who purchase an asset based solely on the expectation that they can later resell it at a higher price, rather than calculating the income it will generate in the future. If there is a bubble, there is also
600-404: A financial crisis. To facilitate his analysis, Minsky defines three approaches that financing firms may choose, according to their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility. Financial fragility levels move together with the business cycle . After a recession , firms have lost much financing and choose only hedge,
675-475: A fixed exchange rate may be stable for a long period of time, but will collapse suddenly in an avalanche of currency sales in response to a sufficient deterioration of government finances or underlying economic conditions. According to some theories, positive feedback implies that the economy can have more than one equilibrium . There may be an equilibrium in which market participants invest heavily in asset markets because they expect assets to be valuable. This
750-402: A funds of funds, direct funds, infrastructure, private debt and real estate, and manages a direct portfolio of more than 150 companies. Its fund of funds segments owns stakes in over 1500 funds. Ardian's 880 investors include institutional investors, funds of funds, government agencies , sovereign funds, family offices, pension funds and insurance companies ). The firm has been ranked one of
825-509: A management buyout to acquire it from the parent company Axa. Axa retained a 23 percent stake, while Senequier, Gombault, Gaillard and the French luxury group Hermès all bought stakes of about 10 percent. The business was renamed Ardian, from the old world hardjan, meaning durability and strength. In 2013, Axa Private Equity announced that it had completed its spin-off from the Axa Group and finished
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#1732891757475900-701: A risk of sovereign default due to fluctuations in exchange rates. Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. Behavioural finance studies errors in economic and quantitative reasoning. Psychologist Torbjorn K A Eliazon has also analyzed failures of economic reasoning in his concept of 'œcopathy'. Historians, notably Charles P. Kindleberger , have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called "displacements" of investors' expectations. Early examples include
975-490: A risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to predict whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur. Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include
1050-590: A run renders the bank insolvent, causing customers to lose their deposits, to the extent that they are not covered by deposit insurance. An event in which bank runs are widespread is called a systemic banking crisis or banking panic . Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007. Banking crises generally occur after periods of risky lending and resulting loan defaults. A currency crisis, also called
1125-428: A small profit could be made with little or no capital. However, when interest rates changed and the incentive for the flow was removed or reversed sudden changes in capital flows could occur. The subjects of investment might be starved of cash possibly becoming insolvent and creating a credit crunch and the loaning banks would be left with defaulting investors leading to a banking crisis. As Charles Read has pointed out,
1200-532: A specialist in laundry products, offered to buy Spotless for 940 million Euros (about $ 1.3 billion) in cash. "By acquiring the Spotless Group, we will strengthen our market position and enter highly profitable growth segments," Henkel chief executive Kasper Rorsted told reporters. The deal, which was subject to approval from antitrust authorities, was completed in May 2015. The deal would slightly increase Henkel's share of
1275-865: Is a France-based, independent private equity investment company, founded and managed by Dominique Senequier . It is one of the largest European-headquartered private equity funds. The company was originally set up by Dominique Senequier in 1996 as the AXA Group's private equity division, but later gained independence in 2013, and rebranded itself as Ardian. The name Ardian (ar・di・an) was inspired by an ancient European language in which 'hardjan' mean strength, durability, and boldness. Ardian manages assets worth US$ 150 billion in Europe, North America and Asia, and has fifteen offices (Paris, London, Frankfurt, Milan, Madrid, Zurich, New York, San Francisco, Beijing, Singapore, Tokyo, Jersey, Luxembourg, Santiago, and Seoul). The firm offers
1350-605: Is based on the work of Thomas Tooke , Thomas Attwood , Henry Thornton , William Jevons and a number of bankers opposed to the Bank Charter Act 1844 . Starting at a time when short-term interest rates are low, frustration builds up among investors who search for a better yield in countries and locations with higher rates, leading to increased capital flows to countries with higher rates. Internally, short-term rates rise above long-term rates causing failures where borrowing at short term rates has been used to invest long-term where
1425-459: Is called a currency crisis or balance of payments crisis . When a country fails to pay back its sovereign debt , this is called a sovereign default . While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight . Several currencies that formed part of
1500-520: Is called a recession . An especially prolonged or severe recession may be called a depression , while a long period of slow but not necessarily negative growth is sometimes called economic stagnation . Some economists argue that many recessions have been caused in large part by financial crises. One important example is the Great Depression , which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and
1575-426: Is little consensus and financial crises continue to occur from time to time. It is apparent however that a consistent feature of both economic (and other applied finance disciplines) is the obvious inability to predict and avert financial crises. This realization raises the question as to what is known and also capable of being known (i.e. the epistemology ) within economics and applied finance. It has been argued that
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#17328917574751650-498: Is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements , capital requirements , and other limits on leverage . Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the former Managing Director of the International Monetary Fund , Dominique Strauss-Kahn , has blamed
1725-501: Is scarce, potentially aggravating a financial crisis. International regulatory convergence has been interpreted in terms of regulatory herding, deepening market herding (discussed above) and so increasing systemic risk. From this perspective, maintaining diverse regulatory regimes would be a safeguard. Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled
1800-571: Is taxed by government and returned to the mass of people in the form of welfare, family benefits and health and education spending; and secondly, the proportion of the population who are workers rather than investors/business owners. Given the extraordinary capital expenditure required to enter modern economic sectors like airline transport, the military industry, or chemical production, these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands. Empirical and econometric research continues especially in
1875-461: Is the internal structure of the market, not external influences, which is primarily responsible for crashes. In "adaptive learning" or "adaptive expectations" models, investors are assumed to be imperfectly rational, basing their reasoning only on recent experience. In such models, if the price of a given asset rises for some period of time, investors may begin to believe that its price always rises, which increases their tendency to buy and thus drives
1950-653: Is the type of argument underlying Diamond and Dybvig's model of bank runs , in which savers withdraw their assets from the bank because they expect others to withdraw too. Likewise, in Obstfeld's model of currency crises , when economic conditions are neither too bad nor too good, there are two possible outcomes: speculators may or may not decide to attack the currency depending on what they expect other speculators to do. A variety of models have been developed in which asset values may spiral excessively up or down as investors learn from each other. In these models, asset purchases by
2025-604: The European Exchange Rate Mechanism suffered crises in 1992–93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997–98 . Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds. Negative GDP growth lasting two or more quarters
2100-507: The South Sea Bubble and Mississippi Bubble of 1720, which occurred when the notion of investment in shares of company stock was itself new and unfamiliar, and the Crash of 1929 , which followed the introduction of new electrical and transportation technologies. More recently, many financial crises followed changes in the investment environment brought about by financial deregulation , and
2175-573: The Unilever brand Ballerina. In 2008, the company purchased Dylon International, the UK's leading dye producer, from the Mayborn Group . Spotless Group owns a total of 18 brands as of 2008. In 2010, AXA Private Equity (renamed Ardian in 2013) sold its 65.6% stake in Spotless Group to British private-equity company BC Partners for a reported €600 million, according to Reuters . In 2014, Germany's Henkel ,
2250-433: The bursting of other financial bubbles , currency crises , and sovereign defaults . Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy (for example, the crisis resulting from the famous tulip mania bubble in the 17th century). Many economists have offered theories about how financial crises develop and how they could be prevented. There
2325-695: The financial crisis of 2007–2008 on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'. Likewise, the New York Times singled out the deregulation of credit default swaps as a cause of the crisis. However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital
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2400-470: The stock market (" margin buying ") became increasingly common prior to the Wall Street Crash of 1929 . Another factor believed to contribute to financial crises is asset-liability mismatch , a situation in which the risks associated with an institution's debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts that can be withdrawn at any time, and they use
2475-422: The world systems theory and in the debate about Nikolai Kondratiev and the so-called 50-years Kondratiev waves . Major figures of world systems theory, like Andre Gunder Frank and Immanuel Wallerstein , consistently warned about the crash that the world economy is now facing. World systems scholars and Kondratiev cycle researchers always implied that Washington Consensus oriented economists never understood
2550-501: The $ 82 billion global laundry care market to 8.7%, still well behind Procter & Gamble 's 26.6% and the 14.8% market share held by Unilever , which sells Persil detergent - a Henkel brand - in some markets. Spotless Group had subsidiaries in 8 European Countries: Spotless Group owned the brand Colour Catcher , which is the market leader in washing machine colour protection. Other Spotless Group brands include: AXA Private Equity Ardian (formerly Axa Private Equity )
2625-602: The 17th century Dutch tulip mania , the 18th century South Sea Bubble , the Wall Street Crash of 1929 , the Japanese property bubble of the 1980s, and the crash of the United States housing bubble during 2006–2008. The 2000s sparked a real estate bubble where housing prices were increasing significantly as an asset good. When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency due to accruing an unsustainable current account deficit, this
2700-488: The 2008 subprime mortgage crisis ; government officials stated on 23 September 2008 that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac , Lehman Brothers , and insurer American International Group . Likewise it has been argued that many financial companies failed in the recent crisis because their managers failed to carry out their fiduciary duties. Contagion refers to
2775-457: The Asian market. The same year, it launched its Infrastructure investment strategy. As a result of the 2007 financial crisis , the company postponed all new operations and instead focused on the management of its portfolio, in an effort to shield its companies from the effects of the crisis . In 2008, Dominique Senequier insisted on distributing a higher percentage of the company's capital gains to
2850-555: The UNPRI and published its CSR Charter. In 2010, during the increased activity in the private equity secondary market , it acquired a US$ 1.9 billion private equity portfolio from Bank of America and a US$ 900 million portfolio from Natixis . In 2012, the company opened an office in Beijing to invest in the Chinese market . When Axa Private Equity was put up for sale in 2011, Senequier led
2925-625: The Year 2013 in France. In 2015, the firm opened an office in Madrid, Spain. On 7 September 2015, it announced the launch of Ardian Real Estate, dedicated to investment in non-residential properties in Europe. On 7 October 2015, it opened an office in San Francisco, USA, In 2016, Ardian celebrated the company's 20th anniversary with a major expansion plan, targeting North America for their next phase of growth. In
3000-415: The actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed. The Banking School theory of crises describes a continuous cycle driven by varying interest rates. It
3075-476: The assumptions of unique, well-defined causal chains being present in economic thinking, models and data, could, in part, explain why financial crises are often inherent and unavoidable. When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run . Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking ), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so
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3150-468: The bursting of other real estate bubbles around the world also led to recession in the U.S. and a number of other countries in late 2008 and 2009. Some economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that
3225-628: The circular relationships often evident in social systems between cause and effect – and relates to the property of self-referencing in financial markets. George Soros has been a proponent of the reflexivity paradigm surrounding financial crises. Similarly, John Maynard Keynes compared financial markets to a beauty contest game in which each participant tries to predict which model other participants will consider most beautiful. Furthermore, in many cases, investors have incentives to coordinate their choices. For example, someone who thinks other investors want to heavily buy Japanese yen may expect
3300-514: The company acquired a 15% stake in Heathrow Airport Holdings from Ferrovial . In March 2024, it was announced Ardian had completed the acquisition of Digital 9 Infrastructure 's entire stake in the UK -based data centre platform, Verne Global in a deal worth up to £450 million. The company operates on five business segments: Ardian was founded and is managed by Dominique Senequier, who
3375-416: The crash of the dot com bubble in 2001 arguably began with "irrational exuberance" about Internet technology. Unfamiliarity with recent technical and financial innovations may help explain how investors sometimes grossly overestimate asset values. Also, if the first investors in a new class of assets (for example, stock in "dot com" companies) profit from rising asset values as other investors learn about
3450-795: The creation of a private equity entity at Axa. Based in Paris, Axa Private Equity started off with ten clients and €100 million worth of assets. The first investment took place in 1998 in the GSI Banque company Linedata. In 1999, the company opened offices in London and New York . That same year, it launched its funds of funds investment strategy. In 2001, it entered the German market by opening an office in Frankfurt . In 2005, it opened an office in Singapore and entered
3525-448: The cycle restarts from the beginning. Mathematical approaches to modeling financial crises have emphasized that there is often positive feedback between market participants' decisions (see strategic complementarity ). Positive feedback implies that there may be dramatic changes in asset values in response to small changes in economic fundamentals. For example, some models of currency crises (including that of Paul Krugman ) imply that
3600-413: The dangers and perils, which leading industrial nations will be facing and are now facing at the end of the long economic cycle which began after the oil crisis of 1973. Hyman Minsky has proposed a post-Keynesian explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy . High fragility leads to a higher risk of
3675-545: The economy. These theoretical ideas include the ' financial accelerator ', ' flight to quality ' and ' flight to liquidity ', and the Kiyotaki-Moore model . Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions. Austrian School economists Ludwig von Mises and Friedrich Hayek discussed the business cycle starting with Mises' Theory of Money and Credit , published in 1912. Recurrent major depressions in
3750-537: The employees of the companies in Ardian's portfolio. In 2009, Ardian acquired 100% of Kallista, a French company specialized in the production of renewable energies . Ardian then invested heavily in transports , energy, water supply and waste management . €2.5 billion were invested in infrastructure systems between 2005 and 2014. The same year it adopted the Principles for Responsible Investment ( PRI ) implemented by
3825-869: The following three years, they launched North American Buyout and Infrastructure funds, expanded in Asia with offices in Tokyo and Seoul, and opened their first South American office in Santiago. In 2017, Ardian opened an office in Tokyo, Japan. In 2020, Ardian bought PRGX. In 2020, founding investor Gombault left the company. In 2022 Ardian bought Míla, Iceland’s largest telecom infrastructure company. In 2023 Ardian opened office in Abu Dhabi, UAE, giving it 16 country offices worldwide. In 2023, Ardian's 1050 staff were responsible for $ 150bn of assets, confirming its place among an elite global group of private investment houses. In November 2023,
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#17328917574753900-408: The form of wages) than the value of the goods produced by those workers (i.e. the amount of money the products are sold for). This profit first goes towards covering the initial investment in the business. In the long-run, however, when one considers the combined economic activity of all successfully-operating business, it is clear that less money (in the form of wages) is being returned to the mass of
3975-507: The funds cannot be liquidated quickly (a similar mechanism was implicated in the March 2023 failure of SVB Bank ). Internationally, arbitrage and the need to stop capital flows, which caused bullion drains in the gold standard of the nineteenth century and drains of foreign capital later, bring interest rates in the low-rate country up to equal those in the country which is the subject of investment. The capital flows reverse or cease suddenly causing
4050-442: The idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk . One widely cited example of contagion
4125-499: The initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, a position supported by Ben Bernanke . It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. Reflexivity refers to
4200-499: The innovation (in our example, as others learn about the potential of the Internet), then still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits. If such " herd behaviour " causes prices to spiral up far above the true value of the assets, a crash may become inevitable. If for any reason the price briefly falls, so that investors realize that further gains are not assured, then
4275-474: The largest companies by amount raised in equity by Private Equity International, and was named "Company of the Year" 2013 by the readers of Private Equity International. Originally part of Axa Investment Managers , the investment arm of Axa , the company operated under the name AXA Private Equity until 2013, when the firm achieved independent status and was renamed to Ardian. In 1996, Claude Bébéar , founder and former Axa CEO, tasked Dominique Senequier with
4350-506: The modern equivalent of this process involves the Carry Trade, see Carry (investment) . Some financial crises have little effect outside of the financial sector, like the Wall Street crash of 1987 , but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of
4425-428: The money they lend. Therefore, they are ready to lend to firms without full guarantees of success. Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand
4500-410: The population (the workers) than is available to them to buy all of these goods being produced. Furthermore, the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices, further exacerbating the tendency for the rate of profit to fall . The viability of this theory depends upon two main factors: firstly, the degree to which profit
4575-545: The price up further. Likewise, observing a few price decreases may give rise to a downward price spiral, so in models of this type, large fluctuations in asset prices may occur. Agent-based models of financial markets often assume investors act on the basis of adaptive learning or adaptive expectations. As the most recent and most damaging financial crisis event, the Global financial crisis, deserves special attention, as its causes, effects, response, and lessons are most applicable to
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#17328917574754650-402: The proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans). Likewise, Bear Stearns failed in 2007–08 because it
4725-406: The renaiming of the firm to Ardian. Per the terms of the deal, Axa Group retained ownership of 23% of the firm, management and employees owned 46%, and the remaining 31% was held by French family offices and institutions. In 2013, 85% of employees were shareholders . In 2013, Private Equity International ranked Ardian in the largest private equity firms by PE capital raised and named it Company of
4800-660: The resulting income. Examples include Charles Ponzi 's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising of 1997, and the collapse of Madoff Investment Securities in 2008. Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of
4875-471: The safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all
4950-425: The same thing they expect others to do, then self-fulfilling prophecies may occur. For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail. Therefore, financial crises are sometimes viewed as a vicious circle in which investors shun some institution or asset because they expect others to do so. Reflexivity poses
5025-425: The spiral may go into reverse, with price decreases causing a rush of sales, reinforcing the decrease in prices. Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency : making institutions' financial situations publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation
5100-456: The subject of investment to be starved of funds and the remaining investors (often those who are least knowledgeable) to be left with devalued assets. Bankruptcies, defaults and bank failures follow as rates are pushed high. After the crisis governments push short-term interest rates low again to diminish the cost of servicing government borrowing which has been used to overcome the crisis. Funds build up again looking for investment opportunities and
5175-558: The tendency for the rate of profit to fall borrowed many features of the presentation of John Stuart Mill 's discussion Of the Tendency of Profits to a Minimum (Principles of Political Economy Book IV Chapter IV). The theory is a corollary of the Tendency towards the Centralization of Profits . In a capitalist system, successfully-operating businesses return less money to their workers (in
5250-515: The very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore, leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy . Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another (see 'Contagion' below). For example, borrowing to finance investment in
5325-399: The world economy at the pace of 20 and 50 years have been the subject of studies since Jean Charles Léonard de Sismondi (1773–1842) provided the first theory of crisis in a critique of classical political economy's assumption of equilibrium between supply and demand. Developing an economic crisis theory became the central recurring concept throughout Karl Marx 's mature work. Marx's law of
5400-479: The yen to rise in value, and therefore has an incentive to buy yen, too. Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw, too. Economists call an incentive to mimic the strategies of others strategic complementarity . It has been argued that if people or firms have a sufficiently strong incentive to do
5475-595: Was one of the first seven women admitted to the French Ecole Polytechnique in France in 1972. Financial crisis Heterodox A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics , and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and
5550-730: Was the spread of the Thai crisis in 1997 to other countries like South Korea . However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages. The nineteenth century Banking School theory of crises suggested that crises were caused by flows of investment capital between areas with different rates of interest. Capital could be borrowed in areas with low interest rates and invested in areas of high interest. Using this method
5625-449: Was unable to renew the short-term debt it used to finance long-term investments in mortgage securities. In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run
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