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11.19.19

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

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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.

Read more: The Souk al-Manakh Crash

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