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.