Financial crisis is a state of financial instability that can occur when the prices of financial assets and instruments plummet, making it hard for businesses and consumers to meet their financial obligations. This can lead to recessions and depression, but there are ways to prevent a financial crisis.
The financial crisis of 2007–2008 resulted from several factors, including the deregulation of the mortgage lending market, incentives to take on too much risk, and credit rating agency failures. High default rates among subprime borrowers also led to an increase in bad debt, which was then packaged together into securities that were sold to investors. As these securities lost value, many of the financial institutions that invested in them became insolvent. These included investment banks such as Lehman Brothers and Bear Stearns, and insurance companies such as AIG. Governments around the world responded by cutting interest rates to near zero, buying up mortgage and other debt, and bailing out struggling banks and insurers.
Although the economy has rebounded since 2020, the effects of the crisis are still being felt. Many individuals and families are still dealing with the effects of foreclosure, unemployment, and decreased incomes. If you are experiencing a financial crisis, it is important to talk to someone about your problems. Friends and family can help you make sense of what’s happening, and they may be able to offer solutions that you hadn’t considered. In addition, there are organizations that can provide free counseling about managing your money, budgeting, finding work and claiming benefits or financial assistance (see “Get more help” below). The financial crisis led to major reforms in banking and finance, congressional legislation that significantly affected the Federal Reserve, and new regulatory agencies to oversee derivatives.
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