Causes of Financial Crises (Financial Economics)
- AS, A-Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 21 Mar 2021
This is a recording of a revision webinar exploring some of the causes of financial crises in developed and emerging market countries.
There are many different types of crises ranging from currency/external debt crises to disturbances in banking systems. There is rarely a single cause of a crisis, most are the result of a combination of complex factors involving a range of market, policy and regulatory failures.
Summary of key causes
Financial market failures
- Irrational exuberance among agents (Shiller)
- Increased complexity arising from financial innovation
- Minsky hypothesis – stability breeds instability
- Unintended consequences of financial deregulation
- Banks too big to fail? Risky behaviour due to moral hazard?
- Interest rates too low for too long (e.g. USA, EZ 2002-2007)
- Large models of the economy which assume agents (businesses and consumers) always behave rationally
- Failures of ratings agencies in pricing risk accurately
Structural changes in the global economy
- Economic imbalances including global savings glut and low real interest rates
- Media and modern communications – immediate feedback