Introduction
The worldâs economy has become a complex system of interrelated elements that encompasses global financial operations. Its development occurs in a strong relationship with the overall development of humanity, reflecting its current state. Positive trends in the economy and international affairs synergize, allowing the tendency to be maintained. Simultaneously, adverse outcomes in the financial environment translate into major issues and uncertainty within society. The most severe cases of such issues are referred to as financial crises, ranging from local to global ones. In the first case, they encompass the market of a specific country and, potentially, its adjacent neighbors without any serious repercussions to the outside world. However, in the case of a global crisis, the overall financial system experiences major turbulence that affects the vast majority of players engaged in global trade and economy. The history of the world has seen several examples of profound economic crises that had a lasting impact on the planet. Historical overview and credible evidence demonstrate that financial crises are not always associated with emerging markets, meaning that prosperous nations are more susceptible if they cannot manage their wealth properly.
Overview of the Issue
There is a growing body of knowledge that analyzes past crises in retrospect while forecasting the future of the global financial system. The world still remembers the aftermath of the most devastating crises that compromised the financial institutes of most developed and emerging communities. In a general sense, this phenomenon is associated with rapid depreciation of assets and instrument value in the financial market. The rapidity of the process is the key defining characteristic that places an event into the crisis category. More specifically, this context is evoked when the patterns of asset value decrease do not conform with the norms of volatility (Zubair et al., 2020). Furthermore, global financial crises usually entail massive depreciation of most assets and markets in general. As a result, the previously reliable financial instruments are rendered less significant. The dangers of a financial crisis stem from the fact that it openly attacks vulnerable population groups through inflation and personal income stagnation. This way, most residents of the encompassed territory feel the impact of a crisis, and, on an international level, this creates a global emergency that damages societyâs resilience.
History of Financial Crises
The history of the world has seen many examples of notable financial crises that led to considerable transformations in the economic landscape. Each prominent event becomes the embodiment of the problems that have been accumulated by the global financial system. When these flaws reach a critical threshold, the crisis erupts, placing the system under considerable stress. Then, its resolution becomes a new beginning and a point at which the global economyâs decision-makers take into account the flaws revealed and make the required amendments. Subsequently, the cycle repeats itself until a new set of issues pushes the situation toward a boiling point. Evidently, each crisis is unique in terms of its effects and, most importantly, causes. The overall concept of the cycle remains unchanged as the financial system gradually approaches a new crisis, but the exact factors that enable it to vary. In this regard, it appears valuable to review three notable cases of past economic crises pertaining to different stages of global development.
The Credit Crisis of 1772
The Credit Crisis of 1772 is one of the first events of the sort that commenced the history of economic emergencies. By the end of the 18th century, the British Empire had become a true superpower in both political and economic terms. Therefore, it hosted a range of prosperous companies and entrepreneurs who worked for the benefit of the nation from London to East India. Nevertheless, seemingly prosperous England (and adjacent countries) fell victim to the panic that spread across its market amid a liquidity crisis. When Alexander Fordyce lost 300,000 pounds of investment and could not pay the loan back to the bank, he escaped England. By doing so, Fordyce prompted other debtholders to panic as the bank that issued his loan collapsed. While the immediate impact of Fordyceâs actions was lethal to one bank, panic in the market extrapolated it to the entirety of England (Tsujimura and Tsujimura, 2021). Furthermore, similar effects occurred in the Netherlands and Scotland, which contributed to the status of the 1772 crisis as a global one. Overall, the economic crisis onset amid a time of peace and prosperity became a hurtful development for the empire.
The Great Depression
Among the many financial crises that ravaged global communities in recent centuries, the Great Depression is among the most prominent ones. In fact, some researchers refer to it as the most severe crisis ever endured by the industrialized world. The Great Depression was preceded by the Roaring Twenties, during which the economy of the United States grew rapidly. This economic growth drew peopleâs attention to the stock market as a source of feasible profits. Naturally, such robust trade had to attract numerous speculators whose reckless actions caused the expansion of the market without any tangible assets to substantiate them. In other words, the pace of the market growth was not on par with the actual industrial development of the country. At some point, inconsistencies led to Black Thursday on October 24, 1929, when a large group of investors decided to sell their overpriced stock (Fronczak, 2018). This caused a massive market crash which was further amplified by the panic that dominated the investment community. As a result, the purchasing power of the population fell along with the nationâs financial performance.
The 2008 Crisis
The two crises that were described above are associated with the events of the distant past. Indeed, they were of global significance in their respective timeframes, but few people today can fathom the magnitude of the situation. At the same time, the financial crisis 2008 exhibits the opposite tendency. It was a serious occurrence that, however, did not match the severity of the Great Depression. However, this crisis happened in the 21st century, becoming the best-known economic depression in recent history. By 2007, experts indicated that years of using cheap credit to support intense economic relations could create a bubble, which might cause the global economy to collapse (Spatt, 2020). Initially, cheap lending promised higher levels of engagement in the financial exchange on behalf of both companies and individuals.
Ultimately, the housing bubble burst, jeopardizing banks and landowners across the globe. Naturally, the stock market reacted with a decrease that had been unseen since the Great Depression. Until 2009, the world remained in a state of global uncertainty that was finally resolved by the development of effective regulatory policies. It was the lack of such policies that enabled the formation of the initial bubble, with unjustified cheap credits being issued freely.
Causes of Financial Crises
A financial crisis is a complicated phenomenon, and a plethora of factors contribute to its occurrence. This statement denotes that it is impossible to find a single event or phenomenon that can be blamed for bringing about an economic downturn. It is always a concourse of various circumstances that results in adverse financial consequences. The narrative below will comment on financial, economic, and societal causes of financial crises.
Political Factors
When it comes to the political sphere, one should admit that its inefficiencies significantly contribute to the issue under analysis. For example, the liberalization of capital markets without a compensating system of regulatory control was a cause of the Asian crisis in the late 20th century (Wade, 1998, p. 1541). This statement denotes that the government did not have sufficient control over the business sphere, which resulted in the crisis. Simultaneously, some scholars admit that deteriorated corporate governance is associated with a decline in currency value. In particular, Anh, Thuy, and Khanh (2018, p. 5) acknowledge that this political factor is more influential than macroeconomic indicators. The removal or relaxation of state regulation over financial institutions is another contributing factor (Daumal, 2018, p. 26). In conclusion, it is not surprising that international conflicts, especially warfare, also increase the likelihood of a financial crisis.
Economic Factors
It is worth admitting that economic factors represent the most influential group. Firstly, credit booms can be considered an essential predictor of a financial crisis. This factor indicates a rapid increase in credit, which will lead to the populationâs decreased ability to repay their loans (Claessens and Klose, 2013, p. 8). Secondly, sharp increases in asset prices that do not match the state’s economic and industrial development level also lead to financial crises. Claessens and Klose (2013, p. 6) explain that individual irrational behavior and microeconomic distortions result in asset bubbles. Thirdly, economic fraud and inequality can also result in the adverse scenario under analysis. In particular, different experts admit that fraud across the mortgage industry and the disparity between the rich and the poor were impactful predictors of the 2008 US financial crisis (Claessens and Klose, 2013, pp. 19, 22). This information demonstrates that numerous economic factors can be considered causes of financial prpblems.
Societal Factors
Even though it can seem unexpected, a societal factor can also lead to an economic downturn. The rationale behind this statement is that when a crisis begins, people tend to panic even if this event affects a different country. For example, Claessens and Klose (2013, p. 13) explain that panic and uncertainty were significant drivers of the 2008 financial crisis. One should clarify that when the first symptoms of the economic downturn were evident, people in the United States and around the world decided to withdraw money from their accounts, which caused the collapse of the banking system. That is why it is not reasonable to ignore the role of a societal factor in causing financial crises.
Impact of Financial Crises
There is no doubt that the overall effects of an economic downturn are harmful. According to Basri (2018, pp. 23-24), the impacts include a decrease in GDP, higher exchange rates, and increased inflation. In addition to that, the business sector suffers from unemployment and income shrinking (Volkos and Symvoulakis, 2021, p. 907). One should also add that individuals experience adverse impacts. In particular, these effects include depression, anxiety, and stress (Volkos and Symvoulakis, 2021, p. 907). However, it is worth admitting that some positive outcomes are possible because improved earnings management is often found after a crisis (TĂźregĂźn, 2020, p. 64). This information demonstrates that financial crises predominantly imply adverse effects, but some positive outcomes are possible in the long run.
Financial Crises and Emerging Markets
According to the presented information, it is impossible to mention that financial markets are necessarily associated with emerging financial markets. The rationale behind this statement is that the identified causes are not always found in developing countries, while developed states can deal with the given factors. In addition to that, analyzing the most evident examples of the financial crises can allow for concluding that the most developed nations are more subject to this issue. For example, the British Empire in the late 18th century and the United States before the Great Depression allocated significant economic power. Consequently, one can suppose that financial crises arise because prosperous nations fail to handle their wealth correctly.
Conclusion
The paper has overviewed the leading causes of financial crises. Evidence from credible sources allowed for concluding that political, economic, and societal factors contributed to this adverse event. The concourse of numerous circumstances leads to an economic downturn, meaning that it is impossible to highlight a single cause. Consequently, these literature findings and the analysis of historical data do not allow for stating that a crisis is an inevitable feature of emerging financial markets. Instead of it, the identified data demonstrates that the most developed nations are more subject to financial crises because they often fail to handle their wealth adequately.
Reference List
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