Financial Crisis

The elephant in the finance room: financial crises. A financial crisis is when asset prices go down the drain, banks are short on funds, and people are short on their debt payments. Financial crises usually lead to recessions and depressions. While many economists see the rise and fall of markets as natural, many governments still try to avoid them altogether, or at least dampen the negative effects of them.

In the earlier days of financial crises, financial crises were more often caused by a panic, causing a run on the banks--where everyone rushes to the bank to take all of their cash out, but the bank doesn’t have that much cash on hand, because they're investing it. The Federal Reserve System was, in fact, created as a kind of antidote to these shocks. It has worked, more or less, for a century and change.

In more modern times, bank runs aren’t so common, but speculative financial bubbles, stock market tumbles, and currency crises are. Like bank runs, these are caused by everyone in the economy freaking out, but oftentimes for good reason. For instance, the financial crisis of 2007-2009, or the global financial crisis, happened (through one lens) because of the overvaluation of the subprime mortgage market from predatory lenders...who then got bailed out by the government and slapped on the wrist.

And through another lens, a lot of people who didn't have a prayer of being able to afford huge home payments took out loans, and promised everyone they'd pay back the money they borrowed. And then didn't. And they were able to walk away, more or less scot free, having as their real only penalty bad credit ratings for 7 years. Pfff. A risk most would be happy to take (with other people's money).

In countries with economies heavily dependent on one good in the global market, currency crises often pop up. For instance, almost half of Venezuela’s GDP was from exporting oil and manufactured goods (but mostly oil). When the global price of oil cratered, it caused the Venezuelan oil market to crumble, crashing its economy and causing hyperinflation from a lack of confidence in the currency, which has proven to be a difficult hole to climb out of.

Yeah, hey Venezuela, we'll cry for you now.