what causes a financial crisis 
a financial crisis may have multiple causes generally a crisis can occur if institutions or assets are overvalued and can be exacerbated by irrational or herd like investor behavior for example a rapid string of selloffs can result in lower asset prices prompting individuals to dump assets or make huge savings withdrawals when a bank failure is rumored contributing factors to a financial crisis include systemic failures unanticipated or uncontrollable human behavior incentives to take too much risk regulatory absence or failures or contagions that amount to a virus like spread of problems from one institution or country to the next if left unchecked a crisis can cause an economy to go into a recession or depression even when measures are taken to avert a financial crisis they can still happen accelerate or deepen financial crisis examplesfinancial crises are not uncommon they have happened for as long as the world has had currency some well known financial crises include the 2008 global financial crisisthe 2008 global financial crisis remains one of the deepest economic downturns in modern history and deserves special attention as its causes effects response and lessons are still relevant to the current financial landscape the crisis was the result of a sequence of events each with its own trigger and culminating in the near collapse of the banking system it has been argued that the seeds of the crisis were sown as far back as the 1970s with the community development act which required banks to loosen their credit requirements for lower income consumers creating a market for subprime mortgages 12the amount of subprime mortgage debt which was guaranteed by freddie mac and fannie mae continued to expand into the early 2000s when the federal reserve board began to cut interest rates drastically to avoid a recession 1314 the combination of loose credit requirements and cheap money spurred a housing boom which drove speculation pushing up housing prices and creating a real estate bubble a financial crisis can take many forms including a banking credit panic or a stock market crash but differs from a recession which is often the result of such a crisis in the meantime the investment banks looking for easy profits in the wake of the dot com bust and 2001 recession created collateralized debt obligations cdos from the mortgages purchased on the secondary market because subprime mortgages were bundled with prime mortgages there was no way for investors to understand the risks associated with the product when the market for cdos began to heat up the housing bubble that had been building for several years had finally burst as housing prices fell subprime borrowers began to default on loans that were worth more than their homes accelerating the decline in prices 15