Many people hear about the financial crisis and its effects and in actuality are oblivious about the actual situation that transpired and led to the financial crisis outbreak.
You will learn in this article, three major financial crises and the actual situations that led to these crises.
But first, let's start with the definition and general causes of the crisis in the financial industry.
Financial Crisis
As the term implies, Financial Crisis is the unexpected or sudden decline in the value of assets.
This sudden decrease in value leads to shortages in liquidity in financial institutions, and the inability to pay back debt being owed by businesses as a result, leads to the shutdown of a lot of businesses.
Causes Of Financial Crisis
Several factors can be the cause of the financial crisis. Among these are;
Major Financial Crisis and the Actual Situations
In this section, we will discuss three major and recent financial crises that occurred and what actually transpired.
The 2008 Global Financial Crisis
It is no news that in about the last 100 years, this 2008 Global financial crisis has been the one with the largest downturns and consequences.
The disastrous consequences experienced were a result of the sequence of events that unfolded which started way back in the 1970's with the Community Development Act.
This act required that banks relax their credit requirements and this gave way to subprime mortgages which later failed to thrive (it was enforced to make loans accessible to those with lesser income, but it came with a higher interest rate).
The lending failure of the subprime mortgages in 2007 started the crisis and it expanded into a global financial crisis.
The effect made huge investment banks like Lehmann Brothers and Bear Stearns collapse in 2008 which had a ripple effect on other banks for the next five years and led to their closures.
All other attempts to limit the spread of this damage failed and then the global economy fell into a deep recession.
From this, one can safely conclude that one of the major causes of the 2008 global financial crisis was as a result of a failed regulatory system.
The 2014 Russian Financial Crisis
The stable Russian economy that was largely dependent on the sale of oil and natural gas (as nearly half of Russia's government's revenue was generated through this means) under the leadership of Vladimir Putin soon took a hit in 2014.
In June 2014, when the oil prices dropped more than 60% from the $100 per barrel threshold, the Russian economy became seriously affected.
Not only did this worldwide decline in the price of oil affect the Russian economy, the problem was also heightened when their ruling leader invaded and snatched Crimea from Ukraine. This action attracted economic sanctions from the U.S. government, Europe and other countries.
Financial Institutions began cutting ties with Russia in terms of capital and cash which led to an aggressive monetary expansion (expansionary policy is intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers source: Investopedia) from the Russian government. This action led to inflation and calamitous losses among Russian banks.
This impact led to a 2% decline in the GDP of Russia. The Russian economy later recovered in 2017 with a 1.5% annual growth recorded according to the World Bank.
The Pandemic-2020 Financial Crisis
An outbreak of pestilence in the year 2020 that led to the untimely demise of many individuals all over the world also caused a decline to the financial system and it seemed everything was grinding to a halt.
The enforcement of this law led to several moving/travelling restrictions to be enforced which in turn had a significant impact on the global supply and demand chain.
Investors were stoked with fear about the consequences of this, the uncertainty surrounding the situation and the future of the global economy. It led to a sharp sell-off in the stock market around the world.
Even the S&P 500 within the interval of about a month, between the 12th of February 2020 and the 23rd of March 2020, lost about 30% of its value. The Dow Jones also experienced its worst days where it fell more than 2,000 points in a single day! During this period the Dow lost about 37% of its total value!
In the end, the government responded and it helped the market rebound quickly towards the end of the year 2020 and 2021 where markets hit all-time highs.
From this, one can infer that the major cause of the financial crises caused by this outbreak was as a result of uncertainty from investors.
Conclusion
To bring this to a conclusion, when you examine closely these three major financial crises, you will notice common threads in their root causes.
The collapse of regulatory systems, overvaluation of assets, and the influence of herd behaviour shows the inadequacies of the financial industry.
These lessons reveals the need for standard regulatory frameworks, diversified economies, and unwavering investor confidence to mitigate the risk of future financial crises.
