December 15, 1997

Review the major financial crises that have rocked global financial markets over the past decade and you'll find a common thread. The U.S. savings and loan debacle, the Mexican devaluation, the Asian currency crisis and others, all share one similar theme - banking system failure. Though each crisis suffered a comparable problem, financial ministers handled each differently. The variety of policy recommendations they proposed to "solve" each suggests the ministers thought the problems were unique. But because the banking system was at the root of each, the solutions should have been relatively similar. To better understand the common elements among the crises, it's important to review the linkages between capital flows, the banking system, the credit system, and the economy. Understanding the relationships between these sectors help explain how shocks in one sector get propagated to the rest the economy and develop into full-fledged crises.

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