Financial crisis 2878852 226132098 2008-07-16T23:26:42Z Andreasmperu2008 7449176 The term '''financial crisis''' is applied broadly to many types of situations in which many financial institutions or assets suddenly lose a large part of their value. Until a few decades ago, many financial crises were [[banking crisis|banking panic]]s, and many or perhaps most [[recession]]s were closely related with these panics. Other situations that are often called financial crises include [[currency crisis|currency crises]], [[sovereign default]]s, and [[stock market crash]]es and the bursting of other types of financial [[Economic bubble|bubbles]]. Many economists have come up with theories on how a financial crisis develops and how it could be prevented. There is, however, no consensus and financial crises are still a regular occurrence around the world. ==A Cyclical theory of financial crises== [[Hyman Minsky]] has proposed a simplified explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any [[capitalism|capitalist]] [[economy]]. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three types of financing firms choose according to their tolerance of risk. They are hedge finance, speculative finance, and [[Ponzi]] finance. Ponzi finance leads to the most fragility. Financial fragility levels move together with the [[business cycle]]. After a [[recession]], firms have lost much financing and choose only hedge, the safest. As the economy grows and expected [[profits]] rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the [[interest]] all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore, they are ready to lend to firms without full guarantees of success. Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their [[expected profits]] rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. [[Refinancing]] becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real [[economic crisis]] begins. During the recession, firms start to hedge again, and the cycle is closed. ==Contagion== In a modern open economy, a country's finances are often dependent on international development. [[Financial contagion|Contagion]] is the idea that a financial crisis in one country is very likely to cause a crisis in another. An example would be the [[Asian_financial_crisis#Thailand|Thai crisis in 1997]]. Then a foreign investor would become suspicious of the stability of any other not sufficiently developed economy and would decide to withdraw his or her money from such a country. This causes a sudden stop of funds for many economies and thus more financial crises. The interesting fact here is that firms in a stable economy, e.g. [[South Korea]], would be denied financing simply because another economy in the region is failing. ==See also== *[[List of recessions]] *[[Russian financial crisis]] *[[Great Depression]] *[[Asian Financial Crisis]] *[[Economic crisis of 2008]] *[[Overend Gurney crisis]] - comprised the Panic of 1866 (primarily British) *[[America's Great Depression]] *[[Flight-to-Liquidity]] *[[Subprime mortgage crisis]] *[[Panic of 1819]] - pervasive USA economic recession w/ bank failures *[[Panic of 1825]] - pervasive British economic recession in which many British banks failed, & Bank of England nearly failed *[[Panic of 1837]] - pervasive USA economic recession w/ bank failures; a 5 yr. ''depression'' ensued. *[[Panic of 1857]] - pervasive USA economic recession w/ bank failures *[[Panic of 1873]] - pervasive USA economic recession w/ bank failures; a 4 yr. ''depression'' ensued. *[[Panic of 1893]] - pervasive USA economic recession w/ bank failures *[[Panic of 1901]] - limited to crashing of the New York Stock Exchange *[[Panic of 1907]] - pervasive USA economic recession w/ bank failures A short list of the Major Financial Crises since 1980 *1982: Mexico, then Latin America *1985: Chile *1989-91: United States Savings & Loan and Latin American debt crises *1992: Sweden *1995: Mexico *1997-8: Asian Financial Crisis *1998: Russia *2001-2: Argentina ==External Links== *[http://www.telegraph.co.uk/money/main.jhtml?menuId=242&menuItemId=10359&view=HEADLINESUMMARY&grid=F7&targetRule=14 Financial Crisis 2008 News and analysis - telegraph.co.uk] [[Category:Financial crises| ]] [[Category:Economic problems]] [[de:Finanzkrise]] [[es:Crisis financiera]] [[fi:Pankkikriisi]] [[fr:Crise financière]] [[it:Crisi finanziaria]] [[nl:Financiële crisis]] [[sv:Finanskris]] [[zh:金融危机]]