Financial crisis can happen to households, businesses, industries, or countries unable to cover their debts. Causes can be traced back to financial philosophies, lack of prudence, or market momentum. The 2007-2008 financial crisis was caused by a deregulation trend that allowed home loan lenders to reduce lending standards and offer increasingly risky loans. A family can face financial crisis due to high costs of living or a sudden crisis like a medical emergency.
A financial crisis occurs when a household, business, industry or country can no longer afford to cover its debts. Some people think of the Great Depression, or the financial disaster of 2007-2008 when they think of a “financial crisis,” but the term can be applied to a family or individual who finds themselves without funds in the event of a medical or family emergency. There are many different causes of financial crisis; often, a situation that took some time to build is thrown into crisis by a dramatic event. In other cases, an unexpected risk or materializing problem can leave a successful business in danger of default.
A major economic crash, such as the 2007-2008 financial crisis, is often caused by a combination of problems. Many economic analysts attribute the causes of the financial crisis in this case to a deregulation trend that has allowed home loan lenders to reduce lending standards and offer increasingly risky loans, including the famous subprime mortgages. Since the amount of people who can buy homes is not infinite, eventually the market has reached a tipping point where the amount of people applying for loans can no longer sustain the rates on offer. Construction slowed down, and many lenders began raising mortgage rates, quickly leading to panic in the financial market. When interest rates skyrocketed, people foreclosed, depriving the major financial firms of the income they relied on, which in turn caused corporate bankruptcies, a burgeoning unemployment rate, and a severe economic depression.
Causes of financial crisis situations of this size can be traced back decades, even to the original financial philosophies of economic giants like John Maynard Keynes. Unfortunately, a lack of prudence and the desire for quick profits can push big industries more and more into risky loans and investments, driven by market momentum. Some economists go so far as to say that fear and panic, rather than realistic circumstances, can push a macroeconomic market into financial crisis.
In a business, there can be many isolated or interrelated causes of financial crisis. Misappropriation, bad public relations, high-profile product recalls, or just plain poor performance can drive a company into insurmountable debt. A macroeconomic crisis, such as a recession, can hurt many businesses, as rising unemployment results in reduced consumer spending, which can destroy many small businesses. Businesses may try to manage risk by paying down debt, such as startup loans, and increasing their monthly cash flow to maintain all checking accounts, but many remain fearfully dependent on the vagaries of the market.
In a family, the causes of financial crisis often include a tight budget or high costs of living. With many essential items from health care to college tuition rising in price since the mid-20th century, even families who plan expenses carefully can find it difficult to save up for a rainy day. Consequently, a financial crisis can occur when a family that is functioning on a monthly basis is faced with a sudden crisis, such as a medical emergency.
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