Youssef Cassis


On his book Crises and Opportunities: The Shaping of Modern Finance

Cover Interview of August 08, 2011

The wide angle

The financial crisis of 2007-2008 triggered a huge demand for history, an unprecedented urge to place the event in a historical perspective.

Two questions came up time and time again. How serious is the current crisis compared with earlier ones?  Can we learn lessons from earlier crises in order to recover from the current crisis and prevent new crises in future?

My book is part of the historians’ effort to meet this challenge and answer these questions.

My approach is primarily qualitative, unlike the far more quantitative This Time is Different: Eight Centuries of Financial Folly, published in 2009 by economists Carmen Reinhart and Kenneth Rogoff.  I concentrate on a limited number, rather than on a vast database of financial crises.

Quantitative analyses inevitably lump rather than split, emphasize the commonalities rather than the specificities.  In the case of major financial crises, whose occurrence is not very frequent, the differences, in other words the singularity of each event, are of paramount importance—the more so if one is to understand how the opportunities for change have, or have not been seized.

It is seldom realized that the financial debacle of 2008 has few parallels in history.  If we consider its three main characteristics—a banking crisis, its taking place in advanced economies, and its carrying extremely high systemic risks—then only three other precedents can be identified.

The first is the panic that gripped the financial markets in late July and early August 1914.  The entire financial system threatened to collapse. In fact, never before, and never again until September 2008, was the international financial system so near collapsing and in need of state intervention to rescue it.  The causes, however, were different: the outbreak of a world war, not an uncontrolled financial boom.

The second parallel is 1929, despite striking differences with 2008: the stock market crash of 1929 was not responsible for the Great Depression, whereas the banking crisis of 2008 was clearly responsible for the Great Recession; the banking crises of the early 1930s, especially in Germany and the United States, were the consequence not, as in 2008, the cause of the economic crisis, though they contributed to aggravate the situation; and at no point was the global financial system on the verge of collapse. Yet 1929 remains the most severe economic crisis in modern history and as such the benchmark by which to measure all subsequent downturns.

The third parallel is the international debt crisis of 1982. Most of the world’s leading banks, primarily American, were seriously exposed and risked failure if Latin American countries, in the first place Mexico, Argentina and Brazil, were to default.  An implosion of the financial system was averted under the guidance of the IMF: the banks rescheduled the debt and agreed to new loans and the Latin American countries accepted the IMF restructuring programs.

A few other crises put financial stability at risk: the Baring Crisis of 1890, when one of the City of London’s leading investment banks had to be rescued under the leadership of the Bank of England; the American Panic of 1907, when New York’s major trust companies had to be rescued under the leadership of J.P. Morgan.  The end of the Bretton Woods system of fixed exchange rates was marked by the return of financial instability in the early 1970s.  Several leading Japanese banks failed in 1997 and 1998, in the midst of the world’s second largest economy’s “lost decade.”

They only emphasize how exceptional an event the financial debacle of 2008 was.  As a strictly financial crisis, it can be considered as the most severe in history: never before did so many leading banks, in so many advanced countries, find themselves at about the same time, in a situation requiring state intervention to avoid collapse.

The recent financial crisis must thus be put in a proper historical context to fully appreciate how much is at stake in the discussions taking place at both national and international levels about reshaping the financial system.