Cleveland Fed researcher examines the emergence and collapse of the Souk al-Manakh, looks at how to prevent such catastrophes

From 1978 to 1981, Kuwait’s two stock markets, the conservatively regulated “official” market and the the unregulated Souk al-Manakh, exploded in size. A year later, the system collapsed, causing huge real losses to the Kuwaiti economy and financial disruption throughout the Gulf region. In this Economic Commentary, Cleveland Fed researcher Ben Craig uses the Kuwaiti experience to show how financial market collapses can unfold with astonishing rapidity, with consequences that last for decades in modern economies with sophisticated financial structures.

“I argue that to manage and help prevent such catastrophes, financial data must be collected at a transaction-by-transaction level of detail from all financial institutions, in both the traditional financial sector and the shadow sectors,” says Craig. “It is clear that the potential for welfare gains from new technologies also exists, and that regulating these technologies effectively requires a delicate balance of not stifling their development while protecting the economy from possible financial instabilities that might result from them.”

Kuwait’s experience should teach us that information on all important financial markets is vital to the maintenance of financial stability, before and after a financial collapse.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892