Definition of Financial Crisis
A financial crisis is a situation where financial assets suddenly lose a large part of their nominal value. It's a complex phenomenon characterized by market crashes, currency devaluations, and bank failures.
The Credit Cycle
Financial crises often follow a credit cycle peak. Excessive borrowing fuels market bubbles. These bubbles burst when lenders demand repayment, leading to asset sell-offs and decreased lending, known as credit crunch.
Tulip Mania
The 1637 Tulip Mania in the Netherlands is often considered the first recorded financial bubble. Prices for tulip bulbs soared and suddenly collapsed, leaving many investors with substantial debts.
Great Depression
The 1929 Wall Street Crash triggered the Great Depression. Stock prices fell 25%, banks failed, and unemployment soared. It profoundly changed economics, leading to the creation of social safety nets.
2008 Global Meltdown
The 2008 financial crisis stemmed from the collapse of the housing market and risky mortgage-backed securities. It led to significant reforms in financial regulation, including the Dodd-Frank Act.
Eurozone Sovereign Debt
Post-2008, the Eurozone crisis unveiled unsustainable sovereign debt levels. Countries like Greece, Italy, and Spain faced severe austerity measures and bailouts, challenging the EU's financial unity.
Cryptocurrency Volatility
Cryptocurrencies have introduced a new frontier of financial instability. Their decentralized nature and speculation lead to high volatility, exemplified by Bitcoin's fluctuating value.