Everything is Everything Ep 119: Financial Crises: Why They Happen, How They Unfold, What to Do
21 snips
Oct 3, 2025 
Ajay Shah, an esteemed economist with decades of experience in financial crises, joins to unravel their complexities. He explains how crises impair financial functions and categorizes them into five types, from banking to securities-market crises. Delving into historical examples like India's 1991 crisis and the 2008 global turmoil, he discusses the role of state intervention and regulatory challenges. Ajay also promotes essential reforms, advocating for a robust financial resolution framework and improved data infrastructure to better prepare for future disruptions.
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Why Banks Are Prone To Crises
- Banking crises recur because banks run high leverage, hold opaque illiquid assets, and face political pressures.
- Correlated regulatory failures and business-cycle shocks turn isolated bank losses into systemic crises.
Avoid Unsustainable Exchange-Rate Pegs
- Learn the macro signs of currency risk: fixed exchange regimes, short-term foreign debt and weak banking.
- Avoid defending unsustainable pegs that invite speculative attacks and large interest-rate spikes.
When Interest Outruns Growth
- Debt crises follow when interest costs grow faster than nominal GDP or income growth.
- When interest exceeds growth, debt ratios escalate and debt service crowds out essential spending.
