The Causes and Consequences of the Financial Crisis Harvard Case Solution & Analysis

The Causes and Consequences of the Financial Crisis Case Solution

Financial Crisis

Financial crisis can be defined as conditions of economy in which financial assets start losing their worth, therefore resulting in a widespread panic amongst the economy. Many financial crises have incurred in the past due to panics in banking sector. These crisis usually result in a loss of paper wealth such as a stock market crisis in which people lose their wealth on the stock market but the company’s asset have not yet been affected.

Main reasons due to which panic spreads is due to the assets of a company or bank being overvalued and therefore, when investors know about this misinterpretation, theystart selling their stake and therefore, the assets start losing theirvalue and getting even below its original value.If no actions are taken by the government, then the economy may suffer a recession or depression.
Categories of Financial Crisis

Financial Crisis Can be divided into following broad categories;

Banking Crisis

Bank crisis happens when bank depositors start withdrawing their deposits, therefore the banks start running out of sufficient reserves as most of them lend their reserves to borrowers and therefore,resulting in the bank being insolvent and depositors losing their deposits. The condition is also called a bank run. If the bank run becomes wide spread amongst the economy, then a banking crisis takes place in which many banks get insolvent. (Simkovic, 2013)

Currency Crisis

Currency crisis can be defined as depreciation of a currency in exchange market,as a result the exchange rate of the economy declines. It usually occurs when a pegged currency is expected by the market participants to fail and therefore, speculation spreading amongst the market resulting in a further decrease of exchange rate.

Speculative Bubbles and Crashes

When the market invests in a security based solely on speculative reasons to sell at higher prices without estimating future incomes, therefore when the security performs adversely and the investors start selling their security then as a result,the bubble bursts and panic is spread amongst the investors and the market crashes.This condition is called speculative bubble bursts.
International financial crises
When a country faces budget deficit and devaluation in currency, then the investors’ confidence declines and capital investment decreases,as a result international financial crisis occurs.

Major Financial Crises

The history is filled with financial crisis that affected the world adversely.Following are some of the major financial crises ever seen;

1. The Great Depression

The great depression was the most damaging and biggest financial crisis of the history.It started in 1929 beginning with the crash of the Wall Street market as the market loss was up to $10 billion, and it finished after the end of the Second World War.(Temin, 1994)...............

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