Money and capital Markets. Evaluate the potential and possible Essay

Money and capital Markets. Evaluate the potential and possible consequences of a systemic financial crisis - Essay Example ust be stated the paper will address the problems in UK but the general scenario of mainly of the U.S is expected including relevant information from the rest of the world. Eichengreen, Barry (2001) stated that there is no agreed definition of financial crises; economists and historians typically assert that â€Å"they know them when the see them.† (Krugman, 2000). He cited the attempt of Eichengreen and Portes (1985) define a financial crisis as a disturbance that leads to widespread distress among financial institutions and market participants, disrupts the market’s capacity to allocate financial resources efficiently, and has repercussions for the nonfinancial economy. Hence he said that international financial crisis, according to their definition, is one where these disturbances and their effects spill over national borders. He thus admits that 20 years later, he is of the view that , perhaps predictably, that it is still hard to improve on this definition. He argued that then that the generality of this definition points up the difficulty of moving from theory to empirics since disturbances to financial markets are not independently observed; thus they must be inferred from the behaviour of asset prices and quantities (Paraphrasing made). Eichengreen, Barry (2001) made it clear as a standard practice in the literature on currency and banking crises, where disturbances to the foreign exchange market are inferred from the behaviour of exchange rates, interest rates and foreign reserves and disturbances to the banking system are inferred from interbank rates and changes in deposits (Paraphrasing made). Is international crisis the same as systemic crisis? Eichengreen, Barry (2001) said, â€Å"International crises that affect different countries simultaneously are analytically distinct from systemic crises that threaten the stability of the global financial system, although the former are arguably a precondition for the latter. Systemic crises are harder to