What is Financial Crisis?

Financial crisis is a state when value of financial assets suddenly decrease and people run out of money. It is a situation when people are unable to pay their debts. This is the phenomenon when price of things such as stocks, real estate, gold etc sharply decline.

Financial Crisis occurs at 3 levels-

1 At Individual Level

2 At National Level

3 At Global Level

1 At Individual Level – Financial crisis at an individual level is when a person loses all his wealth due to various reasons such as natural calamities, business crash etc.

2 At National Level – This is the time when value of all financial assets of a particular nation sharply decline. There is no cash in the banks and people run out of money.

3 At Global Level – This happened between 2007 and 2009 in US when thousands of people lost their jobs. It affected other nations too.

Ways to overcome financial crisis at national level-

1 Liquidity Provisions for Emergency – Government can provide money to banks or other financial institutions in the situation of financial emergency.

2 Restricting the Debts – Government can request the private creditors to cut down the interest rates or extend the repayment term.

3 Interventions in Market – Government can take some measures to stabilize stock market.

4 Fiscal Spending – Increasing spending on infrastructure projects or public services.

5 Cut Down the Taxes – Temporary cut down in tax rates for individuals or businesses.

6 Lowering Interest Rates – Cut down in interest rates in order to encourage borrowings.

7 Tightening Monetary Policy – In order to control inflation there should also be increase in interest rates at the same time.

8 Supply Side Measures – Government can encourage domestic production or facilitate import of essential goods.

9 Reforms in Financial Sector – Strict regulations should be implemented on banks or other financial institutions.

10 Liberalization in Trade – There should be some liberalization in trade in order to promote exports.

12 Fiscal Responsibility – Healthy budget should be maintained in order to tackle with future economic shocks.

13 Arranging Public Awareness Campaigns – Educate public on financial literacy and responsible economic behavior.

14 Open Communication with Public – There should be open communication with public about financial crisis.

15 International Cooperation – Government can seek help from other countries.