When a financial crisis strikes, the value of assets and liabilities can drop dramatically, which can make it difficult for companies and households to meet their debt payments. A financial crisis can also stall economic growth and lead to recessions or depression. Many crises are triggered by panic and herd-like investor behavior: investors dump assets when the risk of a collapse becomes real, or they withdraw savings from banks in a run on them. Others stem from systemic failures, unanticipated or uncontrolled human behavior, incentives to take too much risk, regulatory absence or failures, and contagions that amount to a “virus-like” spread of problems from one institution or country to another.
In the United States, the financial crisis of 2008-2009 resulted in a severe recession and was caused by: a rapid deterioration of mortgage-backed securities including bundled loan portfolios and derivatives such as credit default swaps; the deregulation of over-the-counter derivatives, particularly of credit default swaps; high delinquency rates and defaults on subprime mortgages; the inability of credit rating agencies to correctly price risk; and a lack of transparency in bank balance sheets.
The policy response to the crisis included governments increasing spending to stimulate demand and support employment across the economy, guaranteeing deposits and bank bonds, and purchasing ownership stakes in some financial firms. This prevented the bankruptcies that could have exacerbated the global financial crisis, but also delayed recovery and left millions of people without jobs or homes.