Causes and effects

Financial panics and crises always happen together. Especially in the 19th and early 20th century, many financial crisis were associated with panics. I would like to talk about their causes and effects together. 

Nowadays, it is seems that sub-prime mortgage crises is the direct reason of financial crises. Actually, there are variety causes of financial panic and crises. As I see, these reasons can be mainly divided into four types.

The first reason is the political and social instability. For example, when a regime of a country is not stable, people lose confidence in its economy and may withdraw money from banks. Then financial panic and crisis happen. Recently, this situation is not common as before.

Then, some unreasonable  macroeconomic policies which are unsustainable can also cause financial crises.  For example, in George Bush's term, he deregulate the financial system and support the military industry. During this term, the condition of American financial system became worse and more risky.

Thirdly, if there are problems in financial system and the financial regulatory is unsound, the situation would become serious. For example, Dominique Strauss-Kahn, the former managing director of IMF, has argued that the cause of the  financial crisis of 2008 is 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'*.  

At last, the deterioration of the international financial environment and exchange rate problems are also effective reasons.

While some financial crises have little influence of the financial sector, most of them can lead to serious effects. They may lead to decrease in the rest of the economy and regression in the whole country or even the world. When financial crises happen, panics can increase the risk of destructive. Sometimes, even when a bank still has the ability to pay back to debtors, people drawback their money because of their fear and make the situation worse.

References

Strauss Kahn D., (2008).  A systemic crisis demands systemic solutions, The Financial Times.

Financial panics and crises

In this semester, I would like to conduct a research study on financial panics and crisis. I choose this topic because although I am familiar with financial crisis, the concept of panic is a bit strange for me. I feel really curious about it and want to find the relationship between panics and crisis.

Financial crisis usually means a variety of situations in which some financial assets suddenly lose a large part of their nominal value (Haidar, Jamal Ibrahim, 2009). The form of financial crisis is used to describe different types of crisis across financial sector all over the world. Due to the liquidity of the financial assets, the financial crisis can start in any single country and spread to the worldwide.

Financial Panics, events during which bank depositors attempt to withdraw their deposits, equity holders sell stock, and market participants in general seek to liquefy their assets (http://www.answers.com/topic/financial-panic). It can lead to or deteriorate financial crisis. As I see, it can be also used to describe a phenomenon during the financial crisis, in which a lot of creditors withdraw their fund from the debtors, even though the debtors still have the ability to refund. 

Financial panics and crisis are firmly connected. They also follow each other or happen at the same time.

Now I am reading a book about the Panic of 1907, as I want to see closely to financial panics' effects. And in next a few weeks I will talk about this great panic.

References

Haidar, Jamal Ibrahim, 2009. "The mark-to market valuation and executive pay package regulations within the 2009 US (Bailout) Emergency Economic Stabilization Act", Journal of Economic Policy Reform, Taylor and Francis, vol. 12(3), pages 189-199, September

http://www.answers.com/topic/financial-panics#ixzz2KVwmrtIe