Module 1

FINANCIAL CRISIS
I. FINANCIAL CRISIS AND RECESSION

A. DEFINITION

1) Financial Crisis

 A situation in which the value of financial institutions or assets drops

rapidly.

 A financial crisis is often associated with a panic or a run on the banks

in which investors sell off assets or withdraw money from savings
accounts with the expectation that the value of those assets will drop if
they remain at a financial institution.

 CAUSES:
1. It can come as a result of institutions or assets being
overvalued, and can be aggravated by investor behavior.

2. A rapid string of sell offs can further result in lower asset prices
or more savings withdrawals.

2) Recession

 A period of negative economic growth for two consecutive quarters as

measured by a country's gross domestic product (GDP)

 Recession is a normal (albeit unpleasant) part of the business cycle;

 PERIOD: A recession generally lasts from six to 18 months

 COUNTERACTION: Interest rates usually fall in during these months

to stimulate the economy by offering cheap rates at which to borrow
money.

 Many factors contribute to an economy's fall into a recession, but the

major cause is inflation.

 It is normally visible in the following:

1) real gross domestic product (GDP),

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FINANCIAL CRISIS
2) real income,
3) employment,
4) industrial production and
5) wholesale-retail sales

B. RELATIONSHIP AND EFFECTS

RELATIONSHIP

 One-time crisis events can often trigger the onset of a recession.

EFFECTS

 The Global Recession of 2008-2009 – the worst experienced in the

USA since the Great Depression

1. Banks began to tighten their lending standards and dramatically

reduced the quantity of loans they made.

2. Corporations relying on the money market as source of short

term funding could no longer raise money in this market.

3. Businesses began to hoard cash and cut back on expenditures,

and economic activity contracted (tapered).

4. GDP declined in 5 or 6 quarters (starting in the 1st quarter of

2008).

5. The economy shed more than 8 million jobs as the

unemployment rate reached 10 percent.

Sources:
http://www.economicshelp.org/macroeconomics/economic-growth/cause-recession2/
http://www.investopedia.com/ask/answers/08/cause-of-recession.asp
http://www.investopedia.com/terms/f/financial-crisis.asp