For the definition, economic crisis can be described as an economic situation sudden downturn brought on by a financial crisis in an economy of a country experiences. It will most likely experience a falling GDP. Due to inflation or deflation, it will be bring about that a drying up of liquidity and rising or falling prices.
In addition, it can be take the form in a recession or a depression and periods of low or even economic growth or negative. This situation has shows that production levels lower and will be influence unemployment of which one country increased.
Besides that, GDP can be affect the economic crisis, when GDP has show that negative that is meaning GDP growth negative lasting two or more quarters. Depression have show that an especially prolonged recession. After that, economic stagnation can show that a long period of slow but not necessarily negative growth in sometimes.
In addition, many economic crises were being related with banking fright during in the 19th and early 20th centuries. Therefore have many recessions coincided with these panics. In addition, stock market crashes and the bursting of other financial bubbles, currency crisis, and sovereign defaults are include in other situation that often called financial crisis
Types of economic crisis
1. Banking crisis
2. Speculative bubbles and crashes
3. International financial crisis
4. Wider economic crisis
Economic crisis can be different to four parts that are banking crisis, speculative bubbles and crashes, international financial crisis and wider economic crisis.
Banking crisis have show that one phenomenon called a bank run. Why this phenomenon happen in the bank because when a bank suffers a sudden rush when depositors want to withdrawals his or her deposit. Banks can borrow out most of the cash when they receive in deposit, but it is difficult to quickly pay back to all deposits if depositors suddenly withdrawals their money from banks. When banks haven''t ability to pay backs money to depositors, so may run and leave the bank in bankruptcy. This situation may cause depositors to lose their savings only if they have been covered by deposit insurance. A situation of which bank runs are generally is called a systemic banking crisis or banking panic. For example, a situation had showed that without widespread bank runs, but for in which banks are hesitating to lend. Due to they worry that they haven''t strong and enough funds available, is called a credit crunch. For this ways, the banks are become an accelerator of a financial crisis.
Speculative bubbles is a financial asset to that a bubble when its price exceeds the present value of the future income, that would be received it by owning when it become maturity. But if most market participants want to buy the assets primarily and hope that can selling it later at a higher price, contrarily of buying it for the income when it will generate, this could be to show that a bubble s present. When there also have risks of a crash in asset prices will show that there is a bubble. So that, those bubbles are difficult to discover it''s reliably.
International financial crisis describe a country that maintains a fixed exchange rate and it is suddenly forced to devaluate its currency because it have a speculative attack. This situation is called a currency crisis and also can call as balance of payments crisis. Sovereign default can defined by a country fails to pay back for its sovereign debt. Government can make decisions about devaluation and default; they are always perceived the involuntary results about a change in investor feeling that leads them to a sudden stop in capital inflows or in a sudden increase in capital flight.
At the last part is showing that wider economic crisis. When the introduction, we have discuss about GDP can be affect the economic crisis. Since these phenomena have affect much more than the financial system. Governments are not usually considered about financial crisis per se. But still have some economists argued with that many recessions have been caused by a large part by financial crisis.
1.2 Concept of economic crisis
In September 2008, a crisis of historic proportions struck financial institutions in the US and globally. A series of bank and insurance company bankrupt caused by financial crisis that it effectively halted the global credit markets in 2008. This situation needs required government intervention but that has never happened.
Economic crisis was happen in US and then impact on global. In US, government was taken over the both company that are Fannie Mae (FNM) and Freddie Mac (FRE). In 14th September, Lehman Brothers announce through the media they bankruptcy because they were failing to find a buyer. Bank of America was agreed to purchase two companies that are MER and AIG which are Merrill Lynch and American International Group, due to saved by an $85 billion capital injection by the federal government.
In fact, by September 17, 2008, US have more public corporations had filed for bankruptcy than in all of 2007. These failures had been caused a crisis of confidence that had made bank reluctant to lend money themselves, or for that matter, to anyone. Shortly after, on September 25th, J P Morgan Chase (JPM) agreed to purchase the assets of Washington Mutual (WM). That is a biggest bank failure in history.
Economic crisis 2008 has bases in real estate and subprime lending crisis. At began 1990s, commercial and residential properties had been saw their values increase in dangerously steep when a real estate boom and it was increased in uninterrupted for the nearly a decade. Housing prices had been increases in was meeting with a period of government deregulation. This situation has not only allowed the unqualified buyers to take out mortgages and it also helped to mix the lines between the traditional investment banks and the mortgage lenders.
In addition, real estate loans were scatter throughout the financial system which in the form of CDOs and other complex derivatives in order to dispersed risk. However, banks need forced to acknowledge huge to write downs and can write offs on these products, when the home values failed to rise and this situation had make home owners failed to keep up their payments. These write downs found several institutions at the edge of insolvency with many being forced to raise capital or will go bankrupt.
The UK looks set to not only avoid a recession during 2008. In end of 2008, manufacturing output of UK down to 7%. It has affected lots of parts of the country including banks and investment firms. It has been the longest recession since the war. But it seems likely to grow at a comfortable rate given the recession expectation circumstances.
However, the UK economy was declining at an even quicker rate than originally suspected. UK economy had to show that all sectors of their country to be agonize over of many issued. For the example, with consumer confidence, the housing market, employment and manufacturing either at the lowest point, or dropping faster than ever previously recorded.
1.3 How to impact in UK and US during economic crisis
Economic crisis is present a crisis triggered by a liquidity shortfall in US banking system, it caused by the overvaluation of assets in 2007. Besides that, it has result in the collapse of large financial institutions and the bailout of banks by national governments and it downturns in stock markets around the world.
Housing market has suffered in many areas. This situation had caused numerous evictions, foreclosures and prolonged vacancies. Besides that, have many economists considered that it can to be the worst financial crisis since the Great Depression of the 1930s. It has been contributed to the failure of key for the businesses. It can be declines in consumer wealth when estimated in the trillions of U.S. dollars, governments have bring out a large in amount financial commitments and a significant decline in economic activity. It has been suggested in many causes, but experts still have assigned to varying weight.
In 2006, US have peak the drop sharply of global housing bubble. This situation had caused the values of securities tied to real estate pricing to fall suddenly thereafter; it can be damage financial institutions globally. Credit availability declines and will be damaged investor confidence had an influence on global stock markets where securities suffered large losses during late 2008 and early 2009.
Before that, economies worldwide slowed during this period as credit tightened and international trade declined. Government and central banks responded with unprecedented and unrepeatable fiscal stimulus, monetary policy expansion, and institutional bailouts.
In US, the financial crisis has been linked to care about and unsustainable lending practices compounded by government intervention and have the growing trends of securitization of the real estate mortgages which in the United States. The US mortgage-backed securities which had risks those were hard to assess. It was marketed around the world.
The US mortgage-backed securities for which had risks that were hard to calculate its amount, it were marketed around the world. The risky lending practices can be served to reinforce when have a more broad based of the credit boom fed a global speculative bubble in the real estate and equities. The dangerous financial situation was made it to more difficult with a distinct increase in both oil and food prices.
In 2007, US began the economic crisis had show that the emergence of subprime loan losses. This situation had exposed to other risky loans with over-inflated asset prices. Continuously, on September 2008, Lehman Brothers fall and with loan losses mounting. This had made a major panic broke out in the inter-bank loan market. Due to shares and housing prices declined, it had caused many large and well builds up investment commercial banks which in the United States suffered in huge losses and even faced bankruptcy, it can be resulting in extremely large public financial assistance.
For the UK, economy 2001 to 2007 has showed that double bubble in both housing and even in the stock markets. Home prices can be peaked on the third quarter of 2007. Then it had show a long decline set in. After that, Bank Northern Rock which in UK unable to get the wholesale funding and it had been forced to change to the Bank of England as borrower of last resort in September. It can become an example of a first run on a British Bank in era. At the lastly, UK government forced to nationalized the bank. But, Northern Rock did not mark for the end of the UK government''s involvement in the financial sector.
