How To Understand The Causes Of Financial Crisis

The term “financial crisis” is thrown around in modern media like it is an everyday occurrence or fact of life. Everyone has a different idea of what a financial crisis exactly equates to. This has everything to do with the informal economic “class” a person belongs to, and how much weight they place on the reports and predictions of financial experts.

Genuine financial crises affect all people regardless of their position in life, or how much their net worth is. Every tier of society will tend to see a crisis if their assumed normal financial standing is threatened in any way. In 2008, the United States experience a financial collapse that started in the upper echelons of the financial world but took its toll on almost everyone in the country with a job and a bank account. The 2008 fiasco can be considered a textbook financial crisis. The fix and the outcome eluded all parties involved.

The causes of genuine financial crises are best understood by taking into account the tendencies of people from all stations in life regarding money and investing. There are three distinct levels of the societal financial station. They are general population, business owners, and market investors; or, blue-collar, white-collar, and investment class.

Money and investment systems work together on a theoretical basis of conscientious spending behavior and responsibility-driven money decisions. Majority failure to abide by these theoretical norms will inevitably result in a market collapse and consequent financial crisis.

Blue-collar overspending, over-borrowing, and under-saving will result in a consumer base that is unable to adjust to the slightest changes in the market. False responses by the general population to peaks and troughs in the market can spark a definite lag in growth and GDP.

Mid-level, or white-collar financial crises are most often caused by over-speculation by business owners and lenders. Business people can become overconfident in the habits of consumers and decide to expand their businesses beyond what the real economy will sustain. The rubber band “snap back” effect can be devastating to an economy.

The financial crisis in 2008 was caused by the irresponsibility of the investment class. People involved in the part of the economy have incredible influence over laws and practices affecting an economy. Decades of using money and capital in a manner inconsistent with the truths of economic theory resulted in the collapse of several large banking institutions. Because of how the banking industry is networked, tens of millions of individuals and businesses were negatively affected by these poor decisions.

Any change in the level of net worth will lead an individual or company to assume there is a financial crisis waiting in the wings. Genuine financial crises, like that which originated from Wall Street in 2008, negatively impacted all levels of people and investors. In large part, understanding a financial crisis requires a concerted look into the legal climate and trends surrounding the crisis’s source. Though the financial crises of 2008 were caused by mismanagement at the highest levels of banking and government, any true crises can emerge from the irresponsibility of people at all levels.