Financial crisis
A Financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. A broader reduction of economic activity affecting the whole economy is known as an economic crisis. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy (for example, the crisis resulting from the famous tulip mania bubble in the 17th century).
Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus and financial crises continue to occur from time to time. It is apparent however that a consistent feature of both economic (and other applied finance disciplines) is the obvious inability to predict and avert financial crises. This realization raises the question as to what is known and also capable of being known (i.e. the epistemology) within economics and applied finance. It has been argued that the assumptions of unique, well-defined causal chains being present in economic thinking, models and data, could, in part, explain why financial crises are often inherent and unavoidable.
An economic crisis is a severe downturn in the strength of a country’s economy, often triggered by a financial crisis, and can manifest as a recession, depression, or other extreme conditions. These crises involve a sudden decrease in economic activity, leading to a sharp drop in asset prices and a decline in overall prosperity, sometimes causing social unrest. Common triggers include financial market instability, adverse shocks to supply or demand, and policy failures.
What an economic crisis is
- A state of severe economic decline, which can be more extreme than a typical recession.
- Often caused by underlying financial instability, such as a crisis in the banking sector.
- Can result in a widespread drop in consumer spending and investment, leading to increased unemployment and bankruptcies.
Examples of economic crises
- The Great Depression: A global economic downturn in the late 1920s and 1930s, characterized by a severe and prolonged depression.
- The 2008 financial crisis: A global financial crisis that led to a severe recession.
- The COVID-19 recession: A global economic recession in 2020 caused by the pandemic, marked by a stock market crash and high unemployment, though the recovery was rapid in many countries.
Causes of economic crises
- Financial crises: A sudden collapse in the value of financial assets or a loss of liquidity in financial markets.
- Supply shocks: Events that reduce the economy’s ability to produce goods and services, such as a natural disaster or pandemic.
- Demand shocks: A sudden decrease in the willingness of businesses and consumers to spend and invest.
- Economic bubbles: The bursting of speculative bubbles in asset markets, like real estate or stocks.
- Poor policy decisions: Incorrect or destabilizing government policies related to regulation, taxation, or fiscal and monetary management.
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[1] https://doaj.org/article/24b05a46eac94cf99ca2f2f6d2fe7cca
[2] wikipedia/en/Economic_collapse
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[4] https://www.investopedia.com/articles/investing/011116/3-financial-crises-21st-century.asp
[6] https://www.congress.gov/crs-product/R47479
[7] wikipedia/en/Global_economic_crisis
[8] wikipedia/en/COVID-19_recession
[9] https://www.investopedia.com/terms/e/economic-collapse.asp
[10] https://www.sciencedirect.com/topics/social-sciences/financial-crisis
[11] https://www.investopedia.com/ask/answers/lose-money-stock-market-crashes/
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