12.1 Financial Crises #Notebook

12.1 Financial Crises #Notebook

Financial crises are neither new nor unusual.

A financial crisis occurs when financial markets functioning or function only inefficiently. 

A nonsystemic crisis involves only one or a few markets or sectors, like the Savings and Loan Crisis. 

A systemic crisis involves almost all of the financial system as during the Great Depression. 

Financial crises even helped lead to the American Revolution in 1764-1773, and the United States suffered many systemic crises after its independence.

Nonsystemic crises have been even more numerous....

The credit crunch of 1966.

The stock market crashes (the Dow dropped from 1,039 to 578 in 1973–1974).

The dot-com troubles of 2000, the dramatic events following the terrorist attacks in 2001.

The subprime mortgage debacle of 2007. 

Both systemic and nonsystemic crises damage the real economy by preventing the normal flow of credit from savers to entrepreneurs and by making it more difficult or expensive to spread risks.

Reference

Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation.  Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.