The occurrence of financial crises affects many different sectors. In light of the occurrence of the financial crisis, asset prices fall sharply in value, both companies and consumers are unable to pay their debts and obligations, and financial institutions suffer from a lack of liquidity. Investors sell assets or withdraw money from bank accounts because they fear that the value of their properties will decrease if they remain with financial institutions. What are financial crises, and what is their concept?
The banking panic occurred at the beginning of the emergence of many financial crises in the twenty-ninth and twenty-first centuries, and many of these crises led to stagnation and depression, the collapse of the stock market, the credit crunch, the explosion of financial bubbles, currency crises, and many others. The occurrence of the financial crisis may be limited to one country or sector of financial services and can also spread regionally or globally.
The concept of financial crises
A financial crisis is defined as any situation in which one or more important financial assets, such as stocks and real estate consisting of land, buildings, etc., or natural resources such as minerals, oil, plants, and water, lose an unexpectedly large amount of their face value and are often preceded by periods of economic prosperity and expansion. Excessive credit to borrowers, in addition to distinguishing recessions that follow them more severely than recessions not preceded by a financial crisis, results in companies facing difficulty in meeting their financial obligations, and financial institutions lack cash, liquidity, or convertible assets to be able to finance projects and meet needs. This leads to investors losing confidence in the value of their assets, causing their incomes and assets to be at risk, and making it difficult for them to repay their debts.
The history of the financial crises
The first financial crisis began in the United States of America in 1790 when Hamilton was Minister of the Treasury, where he established the First Bank of the United States, and two years later he developed a plan for a government financial rescue. At that time, the markets collapsed due to speculation and the depletion of hard currency, which led to the occurrence of the first financial crisis in the United States of America. The financial crisis is usually associated with direct financial stagnation, such as the most famous Great Depression from 1929 to 1933 and the mortgage collapse in 2008.
Causes of financial crises
Financial crises occur for several reasons, and the reasons that led to the occurrence of global financial crises are as follows:
- Overestimating the value of institutions or assets.
- Irrational behavior by investors.
- Excessive risk-taking in a stable economic environment.
- The increase in borrowing by banks and investors.
- Organizational and political errors.
Examples of global financial crises
Many financial crises have occurred around the world, the most prominent of which will be addressed in the following points:
The credit crunch of 1772
This crisis occurred after a period of rapid expansion in bank credit. It originated in London and then spread rapidly to the rest of Europe in the mid-1860s. Britain amassed enormous wealth through its colonial possessions and trade. This was followed by excessive optimism, and credit expansion occurred for many. Suddenly, one of the partners of the British banking house withdrew and fled to France for fear of paying his debts. other from Europe.
Stock market crash 1929
The stock market crash began in October and witnessed a strong collapse in stock prices after a period of speculation on the stock exchange and borrowing in order to buy shares. This led to a sharp drop in prices.
The Great Depression of 1929–1939
The Great Depression is considered the worst financial and economic disaster of the twentieth century. It is believed that the Great Depression was caused by the 1929 Wall Street stock market crash, and the situation was exacerbated later by the wrong government policies of the American government. The Great Depression resulted in huge losses in income, high unemployment rates, and a loss of production.
The 1973 OPEC oil crisis
This crisis began when the member countries of the Petroleum Exporting Organization decided to stop the export of oil to the United States of America, so the organization suddenly cut off oil exports, which led to a significant shortage of oil and a sharp rise in its prices, which led to an economic crisis in the United States and many other countries. This crisis was followed by very high inflation accompanied by an economic stagnation that economists called stagflation.
Global financial crisis 2007-2008
The global financial crisis is the worst economic disaster that occurred after the stock market crash of 1929 and the Great Depression. It started with the mortgage lending crisis in 2007 and then expanded into a global banking crisis that resulted from the expansion of the process of granting real estate credit with real estate mortgages, which led to a drop in real estate prices. in the market significantly, and as a result, many banks failed in 2008, and many huge economic rescue measures were taken to limit the spread of damage to the banking sector and the economy, and this crisis has entered the global economy into a recession.
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