Financial Crisis In The Economy

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Financial crisis is defined as a situation when one or more than one institutions lose a huge or major part of their nominal values. Financial crisis can be further explained as the situation when the supply of money cannot compensate for the demand for money, which can also be explained where institutions quickly loses liquidity on its asset, caused by money that is withdrawn from the bank. Due to the growing economy all around the world, financial crisis has become a very common phenomenon across the globe especially in some specific sectors of the economy. Financial crisis can be further divided into varieties of crisis, and each of these crisis can be caused by different reasons, depending on the crisis. However, financial crisis is…show more content…
One of the most common examples of financial crisis is banking crisis. Banking crisis is defined as the situation when the bank is facing bankrupt due to the insufficient of cash flow. Banks usually gain their profit by providing deposit accounts to users, and uses those deposits to provide loans that are paid in a long period of time and gain profit through interest. Try to imagine that if all of the depositors wishes to withdraw their money at the same time, the bank will not be able to return all of the money because part of the money has been used to give out loans or investments. This situation is known as a bank run. Banks facing this kind of situation will lose their liquidity and causing customers to lose their deposit savings (Kose & Claessens, 2013). Therefore, banks are always cautious and will try to avoid this kind of situation from happening. Thus, banks may be unwilling to give out loans or provide credit to users because the bank is afraid that they might be incapable of lending out those cash. But on the other hand, this will cause another situation which is also known as credit crunch and it might also accelerates a financial crisis. Therefore, very bank has a set of measures that strikes a balance on how much they loan that they could provide to their customers and to prevent themselves from these two potential financial crises. (I don't know whether this paragraph is necessary , cut…show more content…
Speculative bubble is defined as a situation when a price of a security suddenly spikes up to a value far above their actual value (Speculative Bubble, n.d.). And when the bubble bursts, it will cause a sharp decrease in the value of the security, causing major loss to the company that issues the security. This phenomenon is caused by people that chooses to speculate in the marketplace. According to a study by Freifeld (1996), There are two kinds of people in the finance market, which are investors and speculators; where investors invests to gain profit for long periods at a relatively low risk, and speculators chooses to do risky gambles to gain relatively higher profit. The speculation bubble has already occurred back in the early years since 1600 in Holland. The Tulip bubble that take place in Holland is a very good example of speculation bubble, where tulips are very rare and cost up to almost a building during that time, but the bubble stretched and bursts during 1637 and causes the price of tulip to drop drastically, and sparks a selling panic that causes huge losses during that

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