How To Understand The Causes Of Financial Crisis

The world financial market is vulnerable despite what many people think. Even though economists may like to fantasize about a perfect financial market that will never have any recessions, bubbles or crashes, the fact is that financial depressions have and will occur throughout the world. To understand the causes of financial crises in a community, country or the world, one has to accept this fact.

Additionally, surprising to many people is the fact that financial depressions are the cause of intense financial success. All of the great depressions in the world have come after a period of financial gain, extremely low interest rates that are available to the masses and a period of expanse and spending. In a sense, financial crises occur because of too much money and consequent spending and greed.

Let us examine the Great Depression in the 1930s. Economists agree that the depression of the 1930s began with a crash in 1929. The crash in 1929 was caused by the 1920s. The 1920s, or the “Roaring ‘20s,” was a time of building and expanding, where the public of America took the stock market for all it was worth.

In addition, overproduction is another cause of financial risks and depression. When industries produce more goods than the people of a society can purchase, they are left with a huge surplus of goods they are unable to sell. This usually happens when industries continually produce exponentially larger amounts of products, but the wages of the buyers do not go up so quickly. These businesses then don’t make their money back on their production investments, and workers are let go. Consequently, the company’s stock goes down, and the company goes out of business.

A third reason why financial depressions occur is the uneven distribution of incomes across a society. The rich get rich while the poor get poorer. Everyone was affected in some way by the depression of the 1930s, but the rich had the money to sustain themselves, and they were also able to take advantage of the poor. For example, if a rich person in a town was able to care for himself and his family despite the depression, he might even have money leftover. The poor, however, would have close to nothing. They might try to sell their homes, crops or any other sellable items they had. Knowing that the poor were desperate, the rich could offer the poor 50% or less of what their goods were actually worth. And they would get it because the poor needed any money or food that was available. The rich, therefore, were able to buy up multiple homes, businesses and land in a town or area for ridiculously cheap. After the recession, they were richer than ever, but the poor were poorer than ever.

The truth is that another financial crisis could happen at any time at any place. Economists are always keeping track of the financial market in major economies like the United States and Europe to avoid such catastrophes in the future.