What is a 'Financial Crisis?

'

A financial crisis is 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.

Why financial crisis happened?

The financial crisis happened because banks were able to create too much money,
too quickly, and used it to push up house prices and speculate on financial markets.

1. Banks created too much money

Every time a bank makes a loan, new money is created. In the run up to the
financial crisis, banks created huge sums of new money by making loans. In just 7
years, they doubled the amount of money and debt in the economy.

2. and used this money to push up house prices and speculate on financial
markets

Very little of the trillion pounds that banks created between 2000-2007 went to
businesses outside of the financial sector:

Around 31% went to residential property, which pushed up house prices faster than
wages.

A further 20% went into commercial real estate (office buildings and other
business property)

Around 32% went to the financial sector, and the same financial markets that
eventually imploded during the financial crisis.

But just 8% of all the money that banks created in this time went to
businesses outside the financial sector.

A further 8% went into credit cards and personal loans.

3. Eventually the debts became unpayable

Lending large sums of money into the property market pushes up the price of
houses along with the level of personal debt. Interest has to be paid on all the loans
that banks make, and with the debt rising quicker than incomes, eventually some
people become unable to keep up with repayments. At this point, they stop
repaying their loans, and banks find themselves in danger of going bankrupt.

4. This caused a financial crisis

This process caused the financial crisis. Straight after the crisis, banks limited their
new lending to businesses and households. The slowdown in lending caused prices
in these markets to drop, and this means those that have borrowed too much to
speculate on rising prices had to sell their assets in order to repay their loans.
House prices dropped and the bubble burst. As a result, banks panicked and cut
lending even further. A downward spiral thus begins and the economy tips into
recession.

5. After the crisis, banks refuse to lend, and the economy shrinks

Banks lend when theyre confident that they will be repaid. So when the economy
is doing badly, banks prefer to limit their lending. However, although they reduce
the amount of new loans they make, the public still have to keep up repayments on
the debts they already have.

The problem is that when money is used to repay loans, that money is destroyed
and disappears from the economy.

What to do about Financial crisis?

There are Seven steps to avoid financial crisis such as-

[1] Civil society should create the maximum number of small savings banks that
offer investment credit -also backed by their capital- but do not speculate. The big
banks will try to undermine this, so groups of small banks may need to form
cooperatives for mutual support.
[2] Civil society should boycott irresponsible, unprofessional banks that offer
credit that far exceeds their own capital reserves.

[3] Irresponsible bankers should be barred from their profession for several years,
or for life, as doctors are in case of serious malpractice.

[4] Homeowners who took out a mortgage not exceeding a reasonable potential for
repayment should be bailed out, if necessary, instead of irresponsible banks. This
would imply the cancellation of many foreclosures, to be protected nonviolently by
civil society.

[5] The focus should be on the suffering at the bottom, often made up of
minorities, the old, women, and the infirm. Alleviating misery is the first priority;
economic growth is second.

[6] Lift the bottom by having the needy satisfy basic needs. Lift communities, not
individuals, through private, public, civil society, and technical sector cooperation.

[7] Forbid short selling (and short buying), which has been found to be
destabilising and toxic for the economy.