Theory of Financial Crises

The Theory of Financial Crises explains how sudden, severe disruptions in financial markets happen, often due to widespread loss of confidence among investors, leading to rapid selling and bank failures. Crises can occur when assets become overvalued, risky lending practices increase, or external shocks cause uncertainty. These events can trigger a chain reaction, affecting the economy by reducing credit availability, decreasing investments, and increasing unemployment. The theory explores factors like excessive debt, asset bubbles, and risky behaviors that destabilize financial systems, emphasizing that crises are often rooted in systemic vulnerabilities rather than isolated incidents.