Question

Please explain one factor that can be responsible for a crisis in trade and a crisis in finance/banking.

Answer 1

The moral hazard factor in the organization can create crisis in the trade as well as in finance & banking. Moral hazard makes the managers to take decisions are negligent in nature and create losses in trade. As a result, the ownership of the firm, or shareholders of the firm suffers due to the decisions taken up by the management. It creates crisis in trade activities. Further, moral hazard is also responsible for crisis in finance & banking that is well evident when banks gave subprime lending in a greed to earn more interest income. It cause the banks to suffer and shareholders faced losses. The bank collapsed and banking crisis was created in the year 2008. It happened due to the presence of moral hazard in their decision making process.
On a similar note, agency problem is also a factor that creates crisis where the managers do not take decisions for the interest of the shareholders, rather they take decisions for the interest of themselves.