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The Souk al-Manakh Crash

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  • Ben R. Craig

Abstract

From 1978 to 1981, Kuwait?s two stock markets, one the conservatively regulated ?official? market and the other the unregulated Souk al-Manakh, exploded in size, growing to the point where the amount of capital actively traded exceeded that of every other country in the world except the United States and Japan. A year later, the system collapsed in an instant, causing huge real losses to the economy and financial disruption lasting nearly a decade. This Commentary examines the emergence of the Souk, the simple financial innovation that evolved to solve its rapidly increasing need for liquidity and credit, and the herculean efforts to solve the tangled problems resulting from the collapse. Two lessons of Kuwait?s crisis are that it is difficult to separate the banking and unregulated financial sectors and that regulators need detailed data on the transactions being conducted at all financial institutions to give them the understanding of the entire network they must have to maintain financial stability. If Kuwaiti officials had had transaction-by-transaction data on the trades being made in both the regulated and unregulated stock markets, then the Kuwaiti crisis and its aftermath might not have been so severe.

Suggested Citation

  • Ben R. Craig, 2019. "The Souk al-Manakh Crash," Economic Commentary, Federal Reserve Bank of Cleveland, issue November.
  • Handle: RePEc:fip:fedcec:00112
    DOI: 10.26509/frbc-ec-201920
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