Financial crisis
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The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value.
In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics.
Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.Financial crises directly result in a loss of paper wealth but do not necessarily result in changes in the real economy.
Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time
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Stages in the crisis
The financial crisis has unfolded in overlapping stages.
• The mortgage crisis. Low interest rates in the early 2000s encouraged many Americans to buy homes. As a result of the increased demand, home prices doubled during the decade ending in 2006, leading to increasing odreal estate prices that would continue to rise indefinitely. Investors from around the world, eager to profit from this steady price climb, bought new investment products tied to mortgages. So many people wanted to invest in these products that, in order to satisfy them, more and more mortgages had to be sold.
But the number of would-be home-buyers with good credit was limited. Banks therefore relaxed their lending standards, and encouraged people who would have been turned down for loans a few years earlier to borrow more than they could afford, or to take out adjustable rate mortgages with low initial interest rates but automatic rate increases that not all customers understood. Many of these borrowers couldn’t keep up with their payments. When home prices eventually fell, some people found that they owed more on their mortgages than their houses were worth; many responded by stopping
The term financial crisis is applied broadly to a variety of situations in which some financial assets suddenly lose a large part of their nominal value.
In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics.
Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.Financial crises directly result in a loss of paper wealth but do not necessarily result in changes in the real economy.
Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time
2
Stages in the crisis
The financial crisis has unfolded in overlapping stages.
• The mortgage crisis. Low interest rates in the early 2000s encouraged many Americans to buy homes. As a result of the increased demand, home prices doubled during the decade ending in 2006, leading to increasing odreal estate prices that would continue to rise indefinitely. Investors from around the world, eager to profit from this steady price climb, bought new investment products tied to mortgages. So many people wanted to invest in these products that, in order to satisfy them, more and more mortgages had to be sold.
But the number of would-be home-buyers with good credit was limited. Banks therefore relaxed their lending standards, and encouraged people who would have been turned down for loans a few years earlier to borrow more than they could afford, or to take out adjustable rate mortgages with low initial interest rates but automatic rate increases that not all customers understood. Many of these borrowers couldn’t keep up with their payments. When home prices eventually fell, some people found that they owed more on their mortgages than their houses were worth; many responded by stopping