The recent financial crisis has left the economy in many countries feeling somewhat unstable and many people can still feel the effects of this global situation. To better understand how a financial crisis affects a country, it is a sudden decrease in paper wealth. This means that the value of the assets that are available in a country at a given time have a lower monetary value; for example, a house can be worth less in an economic crisis despite it being the same house. While this might not affect the economy directly, there is usually a recession that follows due to the various factors that change during this time.
Banks play a big role in dealing with a financial crisis and there have been much news about how the banks reacted when dealing with the 2008-2010 financial crisis. There are two main scenarios; the first is when banks give out loans and not have enough money for those wanting to withdraw if this would happen suddenly. Known as a bank run, there are periods when a great number of clients require withdrawing their money from the banks. While these financial institutions rarely have such amounts of money available, they are forced to go bankrupt and thus making other clients lose their deposits if not insured. The second scenario is when banks don’t give out enough loans due to fear of not having sufficient funds. Such a credit crunch can accelerate a financial crisis and make it much more difficult for individuals as well as companies to get out of a bad financial situation.
The stock market and people speculating bubbles can also affect the economy. There are certain stages in which a company or even a product goes through from its arrival in the stock market to bankruptcy. Speculating the current stage as well as the next one can result a profit but it can also be very risky. A stock market crash can result if most of the participants only buy if they expect others to buy; this will lead to a rise in price which will make for a profit when selling. The main problem appears when the maturity stage is reached and people would sell for a profit rather than hold on and get income from interest or dividends. The price will drastically fall when all participants decide to sell thus leading to a stock market crash.