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18 April 2024

System will survive

By Frank Kane

Do not panic. It is possible to survive market crashes, even a crisis as serious as the one the world has faced over the past 10 days.

The October crash of 1987, the economic recession of the early 1990s, the dotcom bubble of 2001 – just in recent memory, there are examples of severe economic and financial downturns that, at the time, seemed almost like the end of the world. And before that, the big market crash of 1929 and subsequent Great Depression, were awful experiences for people who lived through them. But the world, and the economic system, survived, adapted and came through the other side to flourish.

In some ways, the past 10 days could be seen as an example of the economic “perfect storm.” The economic strains of the US and other western housing markets combined with the acute financial problems of the global banking system to produce a stock market hurricane that swept round the world, reaching its fullest strength early this week when stock exchanges from Tokyo to New York – and many in between – plunged into the red.

Falling share prices just compounded the fall in the value of brick-and-mortar assets in the West. For a while, investors were looking into the abyss. But the action of the US Federal Reserve in slashing interest rates pulled the world back from the edge, just in time.

Whether the Fed’s bold initiative will be enough to hold back the tide this time is yet to be determined. There could still be some force left in this economic cold front, especially if further structural weaknesses are exposed in the American financial system, or a geopolitical shock hits out of the blue.

But for now, financial leaders can take some comfort that concerted action has had a stabilising effect.

The system will survive. It always does.