Essays Economic Crisis 2008

Financial instability directly leads to a great loss of paper affluence but hardly result in adjustments within the real economy (Dwyer, 2009).

Different economists and scholars often offer hypothesis about how financial instability grows and how to prevent the undesirable condition.

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Nature of the crisis Firstly, the great recession has a direct link with the major banking crisis witnessed during the period.

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Bank in the entire United States were suffering massive and rapid withdrawal of financial by depositors; a phenomenon known as a bank run.Banking panic or systematic banking crisis is a situation in which major financial institutions face runs.Banking crisis was not very eminent during the United States great recession, but it fairly characterized the financial instability.A crash is a situation in which price of assets are conflicting and hence customers will only proceed with the purchase if they expect other market participants to purchase.In such an event, a large proportion might decide to sell causing a fall in prices.The occurrence results to a situation where clients lose their deposits.This was to the extent that insurance deposits hardly covered them.This state of affairs is the balance of payment instability or a currency crisis.In case the state is unable to settle its foreign financial debt, this phenomenon is sovereign default.Nevertheless, it is quite challenging to make a prediction on whether a financial asset price will actually equate to its fundamental value.Therefore, it is difficult to determine the reliability of the bubbles.

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