Question

What are the five major forces that can lead to financial crises? Explain each of these forces in depth.

Answer 1

The 5 Major Forces which can lead to financial crises are as follows :

1.Hyper-Inflation

2.High Debt

3.Fraud

4.High Oil Prices

5.Economic Ideology

Hyper-Inflation: Hyper-Inflation is a major force for the financial crises. While Inflation in the range is beneficial for the economy, Inflation if goes out of range, destroys the economy, during the hyper-inflation purchasing power of the currency reduces drastically which lead to strain in the economy and lead to the economic crisis. The recent crisis in Zimbabwe is an example of such a crisis.

High debt: When a country is on the high debt it may happen that the country may not able to serve the interest of that debt which may lead to the huge economic problem in the country and also lead to the financial crisis. The financial crisis of Greece is one such example.

Fraud: High profile fraud may be also the case of financial crisis, In 2008 during the crisis of Lehman brothers till the last moment people didn't know that there is so much securitisation of housing loans that have no value and rating agencies also rated that security very high, that was one kind of fraud which led to 2008 financial crisis.

High/ Low oil price: High/ Low oil prices may lead to financial strain in the countries who are exporting or importing the oil and their economy depends upon it. Many countries import up to 90% of their oil and if the oil prices rise above certain level their economy falls similar happens in low oil price environment, many countries which depend upon export of oil in low price environment cannot sustain as a result financial crisis may occur in such countries. Venezuela is an example of such an economy who faced a crisis recently.

Economy Ideology: There is an economic ideology that free market works better, that means lower regulations but these lower regulations lead to the financial crisis of 2008.