In the ever-changing financial market, there are often some seemingly insignificant minority events, but they can cause jaw-dropping global financial turmoil, just like a butterfly flapping its wings and setting off stormy waves thousands of miles away, which is a vivid portrayal of the "butterfly effect" in the financial market.
Looking back, the British pound crisis in the 1990s is a typical case. In 1992, George Osborne, then the British Chancellor of the Exchequer, insisted that the exchange rate of the pound against the German mark would never fall below 2.775 mark. At that time, the British economy had fallen into recession, with high interest rates, rising unemployment rate, widening trade deficit, enterprise closures, residents' demonstrations and protests, and so on. However, the market did not buy it, and financial tycoon Soros seized the opportunity to lead many speculators to launch a "war" with the Bank of England. The Bank of England tried to stabilize the exchange rate by selling foreign exchange reserves and raising interest rates, but the financial situation was poor, people lost confidence in the government, and the exchange rate of the pound plummeted all the way. Finally, Britain was forced to withdraw from the European exchange rate system, resulting in a loss of 3.5 billion pounds. This incident frustrated the confidence of the global financial market, and the pound assets were sold off, and the funds flowed to assets such as US dollars and Japanese yen, which triggered global market turmoil. The money market, bond market and stock market were all affected, asset prices fluctuated greatly, and the financial derivatives market was even more jittery. Many financial institutions faced huge loss risks due to trading mistakes.
Let's look at the subprime mortgage crisis in the United States in 2008. It started with a small-scale subprime mortgage default in the American real estate market. At that time, some subprime mortgage buyers in the United States could not repay their loans on time due to unstable income and rising loan interest rates. This minority phenomenon did not attract widespread attention at first. However, with the rising default rate of subprime loans, the value of financial derivatives such as collateralized debt obligations (CDOs) backed by subprime loans plummeted, and financial institutions holding these assets quickly got into trouble, such as the bankruptcy of Lehman Brothers and the acquisition of Merrill Lynch. The financial crisis quickly spread to the whole world, and the financial markets of various countries suffered heavy losses. The stock market plummeted, banks closed down, enterprises went bankrupt, the unemployment rate soared, and the global economy fell into recession. This highlights the close relationship of the financial system. The subprime mortgage default of a minority is like a butterfly flapping its wings, triggering a chain reaction in the complex network of financial derivatives, which eventually leads to the violent turmoil in the global financial market.
Financial market is a highly complex system, and each subject and each market are interrelated and influenced each other. Minority events often become a fuse in a specific economic and financial environment, triggering a series of chain reactions. When the economic fundamentals are fragile, such as economic growth slowdown, high debt, asset bubbles, etc., niche events may be amplified, causing market panic, prompting investors to change their trading behavior, and asset prices fluctuate greatly, thus affecting the stability of financial institutions and eventually affecting the global economy.
In such an environment, investors and financial institutions should always be vigilant and pay close attention to all kinds of minority events and their potential impacts. At the same time, governments and regulators should also strengthen financial supervision, guard against systemic risks, maintain the stable operation of financial markets, avoid the catastrophic consequences of niche events turning into global financial turmoil, and let financial markets move forward in a steady way instead of being subverted by tiny "butterfly wings".
