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A financial crisis hello is a situation when money demand quickly rises relative to money supply. Until a few decades ago, a financial crisis was equivalent to a banking crisis. Today it may also take the form of a currency crisis. 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 phenomenon. A stock market crash is an example of a financial crisis. Theatrical promotional poster depicting a bank run A bank run is a type of financial crisis. ...
A currency crisis (also known as a financial crisis) occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. ...
Black Monday (1987) on the Dow Jones Industrial Average A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. ...
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 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. Image:Minsky. ...
Capitalism generally refers to an economic system in which the means of production are all or mostly privately[1][2] owned and operated for profit, and in which investments, distribution, income, production and pricing of goods and services are determined through the operation of a free market. ...
A Ponzi scheme is a fraudulent investment operation that involves paying returns to investors out of the money raised from subsequent investors, rather than from profits generated by any real business. ...
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. // [edit] Introduction [edit] Definition If we were to take snapshots of an economy at different points in time, no two photos would look alike. ...
In macroeconomics, the definition of recession is a decline in any countrys Gross Domestic Product (GDP), or negative real economic growth, for two or more successive quarters of a year. ...
Profit is what is gained, after costs are accounted for. ...
For other senses of this word, see interest (disambiguation). ...
Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. ...
In economics, crisis is an old term in business cycle theory, referring to the sharp transition to a recession. ...
A classic example
Contagion In a modern open economy, a country's finances are often dependent on international development. 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 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. There are very few or no other articles that link to this one. ...
The Asian financial crisis was a financial crisis that started in July 1997 in Thailand and affected currencies, stock markets, and other asset prices in several Asian countries, many considered East Asian Tigers. ...
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