Theories on Causes of Financial Crisis

Table of Contents Introduction Causes Effects Recommendations Conclusion Introduction Financial crisis is a term used to refer to a situation in which the value for money goes up hence attracting high demand. This in return increases its supply. It entails unstable financial markets in which the currency flow is limited and hence affects households and businesses. In other words, the demand and supply of goods and services is disrupted. Many economists have developed theories on causes of financial crisis and how it can be avoided.Advertising We will write a custom essay sample on Theories on Causes of Financial Crisis specifically for you for only $16.05 $11/page Learn More Causes Mortgage lending is one factor associated with financial crisis. This is because earlier on the institutions dealing with the mortgages did so at low interest rates for high priced houses. In addition, the conditions involved were favorable to many people. This led to many people taking this mortgage loans yet they could not afford. A financial system shock disrupted the situation and the prices of the houses fell and many people could not pay their loans. The institutions therefore experienced liquidity issues. This caused such business to be risky and not many people could invest in them. There are those factors that are not related to subprime mortgage market but have contributed immensely on the financial crisis. They include small banks, agents providing loan security, investment procedures by the government and other financial institutions lending and proving securities for the same. Effects Financial crisis has led to collapse of many businesses, high rate of unemployment hence poverty as well as reduction in government revenues. Moreover, slow economic growth characterized by decreasing stock market and weak currency. Most of the economies have continued to decline and financial institutions have continued to suffer. For this reason, there is limitation on the circulation of currency. Moreover, the interest rate on the loans from the banks has increased. It has also resulted to many economies especially those that are developing to seek help from financial institutions such as World Bank and International Monetary Fund (IMF). In addition, their policies and conditions put in place by these institutions are harsh and thus continue to weaken these economies. Financial crisis has an impact on the business in that it hinders export of goods and services hence increasing the demand for them. The high demand and low supply on the other hand affects trade because it decreases purchasing power for many people.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Recommendations Financial crisis can be averted using various tools. For example the governments should control such a situation by decreasing interest rates. This can be achieved b y directing the currency back into the banking system. This would ensure that market liquidity is supported and at the same time encourage currency flow. Mitigation measures should also include reviewing policies in order to reduce the negative impacts on the economies. Favorable policies should be implemented so as to correct the situation. For example trade policies ought to change and regulations be revisited. The policy and the regulations should be based on the accurate information about market. In addition, financial institutions should be funded in order to act as security during crisis. Conclusion Financial crisis is characterized by unstable markets. It can occur in any economy and when it does, numerous effects are felt. Financial crisis can be caused by various activities in the economy. Many economies therefore try at all cost to prevent it. They do so by regulating the interest rates on the loans and increasing the purchasing power of the people. The demand and supply o f goods and services is also controlled. This essay on Theories on Causes of Financial Crisis was written and submitted by user Jaidyn Mooney to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.