What Is A Financial Crisis?

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What is a financial crisis? According to Mishkin and Eakins (2015), “a financial crisis occurs when information flows in financial markets experience a particularly large disruption, with the result that financial frictions and credit spreads increase sharply and financial markets stop functioning. Then economic activity will collapse” (p.165). Throughout history the United States of America has experienced six significant financial crises. Each crisis left the United States of America’s economy is disarray.
Furthermore, many economists believe that a major economic crisis occurs about every seven years. Consequently, this raises the question, should the United States Government bailout financial institutions during an economic crisis?
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According to the Department of State Office of Historian, “During the 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States… The embargo both banned petroleum exports to the targeted nations and introduced cuts in oil production”. The embargo lead to a shortage of oil, increased oil prices per barrel, lead to the devaluation of the U.S. dollar and caused a global recession.
The third financial crisis faced by the United Sates was the recession of the 1980’s. Sablik (2013), states that the main reason for the recession of the 1980’s and the leading factor for this financial crisis was caused by the chairman of the Fed, Paul Volcker. “(Volcker) felt strongly that mounting inflation should be the primary concern for the Fed: “In terms of economic stability in the future, [inflation] is what is likely to give us the most problems and create the biggest recession” (Sablik, 2013). Volcker’s aggressive tactics back fired and lead to high unemployment rates and high interest rates.
The fourth crisis was Black Monday, the stock market crash of 1987. According to Colombo (2012), During this time the Federal Reserve raised interest rates to try and control inflation. This did not sit well with individuals who were invested in the stock market. So, in order to secure their funds, they invest in portfolio insurance to counter
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