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The library of essays of Proakatemia

Financial Crisis 



Kirjoittanut: Miika Hautamäki - tiimistä Ei tiimiä.

Esseen tyyppi: Yksilöessee / 2 esseepistettä.
Esseen arvioitu lukuaika on 5 minuuttia.

Financial Crisis 

 

What is a financial crisis?  

Financial crisis means a situation in where assets see a crucial downhill in their value, when money and assets are losing its value it means that companies and normal people are not able to pay off their debts and whit that they are also not getting any money. On top of that many financial institutions like banks, insurance companies, brokerage firms and investment dealers experience liquidity shortages. There is many variations of financial crisis or there is many occasions that can be seen as a financial crisis for example the crashing of the stock market or a currency crisis. These types of situations can be affecting in different levels, the crisis can only be affecting banks or single economies and in the worst case scenario they can be affecting the whole worlds economy. There is a variety of different types financial crises, but all of them are really harsh for the economy and it is good for everyone to be prepared in case there is financial crisis coming at point. The crises might cause people to lose their jobs just like we saw when the covid-19 hit the world. Many people were laid off temporarily or some people were even just kicked out of their work. This caused people to not get any salaries and they had to survive with their savings, while the cost of living was going up because of the financial crisis in the world.  (Kenton)

 

What causes a financial crisis? 

Financial crisis can be caused by a numerous of different reasons, but in the past it has been seen that these crises can be caused by for example the prices of institutions or assets being valued way too high, which will end up to the prices crashing down at some point. As a good example we could use a situation where there is swift occurrence of selloffs which can be causing the asset prices to plummet downwards, this can cause individuals to get rid off their assets and also individuals to make big withdrawals from their savings if there might be coming a possible bank failure in the future. Responsible factors in a financial crisis include things like systematic failures, worldwide incidents for example things like pandemics. Even when the world or institutions have been preparing to the best they can to prevent a financial crisis, they still happen sometimes and people are just unable to do anything to prevent it from happening. A good example would be the recent Covid-19 that struck the world. It had major impacts to the economy of the world, you could consider Covid-19 also as a kind of an financial crisis, because it caused the assets and the stock exchange to come down very fast and it also made them drop by a lot. This caused to companies to go bankrupt when the whole world shut down, but it also impacted many peoples lives when people were not able to work and that way they were unable to get any money from anywhere because of the restrictions that the pandemic set to the whole world. Covid-19 forced individuals to withdraw their life savings to survive trough the pandemic and keep food in their tables. Also in the company level the pandemic made the companies to shut down offices and close down many of their locations just in order for them to save money so the whole company does not go bankrupt.  (Kenton)

 

Types of Financial Crisis 

Like mentioned before, there is a variety of different types of financial crises. These different types of crises are caused by various of different reasons but all of these crises are often really harsh for the economy either on the scale of one economy or in the worst case scenario for the economy of the whole world. Below you can find a little scratch from the different types of crises that there is.  

 

Banking crisis 

When a bank is suffering from a banking crisis, there is a big amount of withdrawals happening from the bank which causes the bank to go into a so called bank run. Most of the times banks lend out the money that is deposited to the bank. When the banks lend out the money that are deposited, it is then hard for them to pay back the money fast that was deposited because they have lend out the money already to somewhere else, which causes the customer to not get back their deposit. (Wikipedia)  

 

Currency crisis 

A currency crisis is often known more with the name devaluation crisis, in this event the a currencies depreciates with 25% or even more. A generic way to define a currency crisis is that when an individual in the exchange market are looking out for the dropping of the pegged exchange rate, causing a big amount of speculation for the peg that accelerates the failure even more and in the end forces a devaluation of the currency which turns into a currency crisis. (Wikipedia)  

 

Speculative bubbles 

These types of crises often happen in large. For example when the individuals are buying assets strictly for the reason that they are looking for selling the assets later on at a higher price, and they do not calculate the expenses and income of the asset that it has during the time that they are keeping it. This can for example happen in the real estate market. Individuals will just buy apartments for investment purposes with loan, assuming the price of the asset to go up with time. At this point the prices are rising and rising when everybody wants to buy, but after a while the prices for the apartment is so high that there is not anymore people interested in buying. This is when the bubble might pop, because the loan payments are pressuring the current owners but there is not anymore buyers willing to buy the apartments which then causes the bubble to pop and the prices will drop drastically down. (Wikipedia)  

The crises can also spread all the way to the global level, some of the crises mentioned above might not affect the global market that much if they are on a smaller level. But if there is a bigger level of a real estate bubble for example, it might have a impact on the economy of the whole world like it did In 2008 when there was a real estate bubble that affected the whole global economy and created a financial crisis.  

 

 

Conclusion  

In conclusion, a financial crisis is characterized by a significant decline in the value of assets, leading to widespread economic challenges. These crises can result from various factors such as overvaluation of assets, systematic failures, and global incidents like pandemics. As seen with the COVID-19 pandemic, financial crises can have far-reaching impacts on both individuals and companies, causing job losses, bankruptcies, and a need for individuals to dip into their life savings for survival. There are different types of financial crises, including banking crises marked by bank runs, currency crises involving sharp depreciation, and speculative bubbles where asset prices rise unrealistically before collapsing. These crises, whether on a local or global scale, underscore the importance of being prepared for economic downturns that can have profound effects on societies and economies worldwide. 

Sources :  

Kenton, W. Financial Crisis : Definition, Causes, and Examples. Read on 5.12.2023. Updated on 15.2.2023. https://www.investopedia.com/terms/f/financial-crisis.asp  

Wikipedia. Financial Crisis. Read on 7.12.2023. https://en.wikipedia.org/wiki/Financial_crisis  

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