Causes of Financial Crisis

Financial crisis has been in limelight for too long right from the start of year 2008 when there was sub-prime mortgage crisis in the USA and now even bigger financial crisis is looming over the world in the form of euro zone crisis which is essentially a debt crisis and right steps are not taken it can lead to bankruptcy of one or two European nations. Financial crisis do not happen overnight but rather there are some reasons or causes due to which they happen, given below are some of the causes of financial crisis –

  1. The root cause behind financial crisis is the nature of human being which implies in today’s world all want to earn quick money and have become greedy which leads to some irrational behavior by such individuals and it all comes back to haunt them in the form of financial crisis.
  2. Another reason behind financial crisis is the presence of too much debt, both at individual and company level which implies that people or companies tend to spend more than they earn which in turn leads to mounting debts and eventually results in such crisis like situations.
  3. Presence of speculators and hedge funds is another reason; they tend to push the prices of all assets classes whether its commodities real estate or stocks to such an extent which are not sustainable and finally it tend to blow up leading to financial crisis.
  4. Financial crisis used to happen 50 years back also but the present financial crises are much bigger and one of the reasons behind it is the presence of structured products like derivatives and swaps.
  5. With many countries spending majority of their money on defense and military, the governments all over the world do not have enough resources to reduce the effect of such financial crisis.
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