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The collapse of the US housing market in 2008 and the ensuing economic crisis is still vivid in the minds of most. This financial crisis that had dramatic global repercussions as well as the U.S. Investors panicked and withdrew billions of dollars from their savings accounts. At this time, the US economy came close to collapsing entirely.
The economic conditions of the financial crisis allowed asset prices to fall sharply and consumers could not repay debts causing banks to suffer a liquidity problem. The government also defaulted, from the stock market crash due to an explosion of speculative financial bubbles in the sub-prime lending market. This invariably led to a currency crisis affecting the U.S dollar which led to a global economic crisis.
The Last Great Financial Crisesses of The Past Hundred Years
The financial crisis was initially limited to the banking sector and the stock market. It also had different scales, (i.e. crisis can occur in one country, in one region) that affected the entire global economy. However, an economic crisis does not always infere economic collapse. For instance, millions of people lost their homes, jobs and savings during the financial crisis that occurred in 2008. It was not quite a complete collapse since the population was still provided with essential services at taxpayer expense which also exacerbated the situation.
A number of financial crises of the 20th and 21st centuries have led to recessions or depressions over the ensuing years. The Great Depression of 1929-1933 was the worst financial and economic disaster of the 20th century. It is believed that the fall of stock prices caused the Great Depression after a period of violent speculation and borrowing in 1929. The situation was aggravated by inadequate financial regulatory decisions of the US government.
The depression lasted for almost ten years and led to a massive loss of people’s income, a record level of unemployment, and a drop in industrial production. It was eventually stemmed by the “New Deal” offered by President Franklin Delano Roosevelt in the areas of social protections and programs for consumers and new regulatory measures that separated commercial banking from investment banking.
The OPEC oil crisis of 1973 began with an embargo by Arab OPEC members against countries that supported Israel in the Yom Kippur war. Given how much the world economy depended on oil, both higher prices and political uncertainty led to the collapse of the stock market in 1973–1974, when the Dow Jones Industrial Average fell by over 45%. This led to shortages and line ups in most countries like the U.S that depended on foreign petroleum imports.
The Asian financial crisis began in July 1997 with the collapse of the Thai baht. The government of Thailand was forced to abandon their policy that pegged it to the US dollar. The result was a massive regional devaluation,that spread to most Asian countries. The injection of significant financial support into the economies of many countries could not stem the damage, and the global economy fell into a recession.
How Does a Financial Crisis Happen?
If an economic collapse is expected to happen soon, it will occur suddenly. The surprising reasons for the breakdown of the economy is a major factor. As for the global economy, the leading economic institutions are presently giving grim financial statistics. Financial crises are usually the result of certain events. Many negative processes in the world can provoke an economic recession or a significant slowdown in global economic growth, whether its currency, market or bank driven.
The present macroeconomic viewpoint indicates that risks of a global recession are high. As the current trade war between the U.S and China escalates, and customs tariffs rise to 25% respectively. The US national debt has also reached a record of $22 trillion, which is 108% of the country’s GDP. The growth in China’s economy has also slowed to approximately 6.5%/ year, as the forthcoming bubble in the Chinese real estate market seems ready to explode.
In Europe, the UK is in economic limbo due to Brexit as annual zero growth has been observed in the economies of many European countries. Even economically developed countries, such as France, Canada, and Chile, have debt problems. The overall debt levels are higher now than before the previous crisis of 2008. If major countries refuse to resolve their debt problems, it can have dire consequences for the global economy.
A financial crisis can arise if assets become too overvalued and interest rates increase significantly by any single country. The irrational and panic driven behavior of people can also aggravate and accelerate an economic recession or depression. Under the given circumstances, even when governments begin to take measures that prevent economic troubles, negative consequences can still be felt for years.
Thus, in 2006–2007, sub-prime loans and their systematic non-performance stimulated the housing boom, which led to speculation, the rise of real estate prices, and the emergence of a housing bubble. After that economic crisis, the US government adopted the laws focused on Wall Street and the protection of consumers. Massive financial regulatory changes were also introduced in every aspect of the US financial system.
What Is the Impact of a Financial Crisis?
A financial crisis can take many forms, including a credit panic and a stock market crash, but it differs from a recession, which often follows such a crisis. The consequences of a crisis can lead to drastic changes, and can be a contentious struggle to exit it. Previous crises have shown that crises differ not only in their root causes and consequences but also in their essence. Economic crises can be global and local, macro and micro ones.
The global nature of a crisis does not imply that its consequences will be the same for all countries and all sectors of the economy. Its effects vary greatly depending on the level of industrial development of the states and the triage measures taken by financial authorities. This is observed in examples of changes made by many countries since 2008. The rate of decline in GDP in different countries have differed quite significantly, and it is possible to assume that the long-term consequences of a crisis are also unlikely to be the same.
However, the most vulnerable to a crisis consequently are socially significant indicators in society, in the areas of labor relations, banking and investment and, of course, the industrial index of the respective national economy.
How to Come Out of a Financial Crisis?
Many economists had failed to predict the global financial crisis of 2008, and they underestimated its effects on the worldwide economy. The current events in the credit market deserve more attention by economists, regarding the analysis of the economic consequences of financial crises but also further study of business cycles.
If events unfold in a negative direction, governments must react quickly to avoid a complete economic collapse. Thus, the US Federal Reserve may avert financial meltdown by utilizing its restrictive monetary tools and preventing hyperinflation. The Federal Deposit Insurance Corporation should support banks as a way to protect consumers and stem liquidity issues.
The country’s president can release strategic oil reserves to compensate for oil embargoes as well as to fight National security cyber threats. The law-enforcement structures of most states must respond to any terrorist attack, and halt the transportation systems to quell riots. In other words, most government programs are designed to prevent economic collapse and the ensuing turmoil as a result of it.
However, these potential protection measures against crises caused by climate change and rising sea levels, depletion of fish stocks, and extreme weather can also cause dramatic consequences. For example, as ocean levels increase by over 10 feet, the water will flood houses of 12 million people and the damage will be hundreds of trillions of dollars.
A great effort was made to return to economic growth in the US in the past few years. However, many experts have expressed concerns, the US government does not have sufficient effective tools to preventing a possible future financial crisis.