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Six Policies That Worked for Past Financial Crises
From Latin America to Asia, here are six solutions to past financial crises. 

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With so many proposed policies to fix the global economy, which ones will work? Here’s a look at six historical examples that turned out reasonably well, according to investment strategist Ed Yardeni of Yardeni Research.

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Buenos Aires Bank

Latin American Debt Crisis (Early 1980s)

During a recession caused by soaring oil prices, Latin America suffered a major liquidity crunch. Brazil, Argentina and Mexico received IMF loans, implemented austerity plans and made free-market reforms that averted a depression, and most of Latin America has since prospered.

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Ecuadorean Money Changer

International Banking Crisis (Late 1980s)

When Latin American nations defaulted on their loans, commercial banks suffered massive losses, resulting in a major credit crunch. U.S. Treasury Secretary Nicholas Brady proposed what are known as Brady Bonds, which let commercial banks exchange their claims into tradable instruments to eliminate debt. The move paved the way for a market for sovereign debts of emerging economies.

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FDIC Graphic Logo

S&L Crisis (Early 1990s)

A deregulation of the industry in 1980 led thrifts to finance risky real estate development. When the Tax Reform Act of 1986 was passed, real estate prices fell drastically. Three years later, Congress created the Resolution Trust Corporation, which used equity partnerships to liquidate real estate and financial assets from insolvent thrifts.

Sweden Central Bank Flag

Swedish Banking Crisis (Early 1990s)

Deregulation of Sweden’s banking industry in the 1980s caused a real estate bubble that gave way to a broad financial crisis. In 1992, the government took action by guaranteeing all bank deposits, which forced banks to write down losses and issue warrants to the government. Distressed assets were sold through a new agency and the government recouped most of its bank bailout money by selling shares in the companies.

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Thai Baht Notes

Asian Debt Crisis (1997-1998)

Southeast Asia’s booming export business ended in 1997 when lenders exited the industry for reasons that began with the collapse of Thailand’s currency, the Thai baht. A credit crunch swept through the region and the IMF responded with a ‘structural adjustment package’ (SAP) that forced crisis-stricken nations to cut their spending, allow insolvent banks to fail and raise interest rates.  The program, while controversial, appeared to have helped the region.

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Bank Executives Collage

U.S. Banking Crisis (2007-2008)

In October 2008, the Federal Deposit Insurance Corporation created the Temporary Liquidity Guarantee Program (TLGP) to provide liquidity to the interbank lending market. The program guaranteed the newly-issued senior unsecured debt of banks, thrifts and certain holding companies. It also provided full coverage to all non-interest bearing deposit transaction accounts, no matter what the dollar amount.  Commercial banks raised $260 billion in the bond market from the fourth quarter of 2009 through the fourth quarter of 2010, according to the Fed’s flow of funds data. The financial sector raised $314.3 billion in net new equity during 2009 and another $190.8 billion during 2010.

Photo Source: Reuters

Six Policies That Worked for Past Financial Crises

From Latin America to Asia, here are six solutions to past financial crises. 

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