A financial crisis is a state of financial instability that occurs when asset prices drop, businesses and consumers cannot pay their debts, and financial institutions suffer liquidity shortages. Often, these events are preceded by a period of heightened risk-taking and overborrowing.
For example, the mortgage market blew up in the early 2000s when low interest rates encouraged millions to borrow beyond their means and buy homes that were far more expensive than they were worth. These loans were bundled together by banks and sold to investors as mortgage-backed securities (MBS). As home prices dropped, subprime borrowers defaulted on their loans and the value of MBS plummeted. Investment firms, mortgage lenders, and insurers that held these securities faced bankruptcy or required government bailouts.
The crisis climaxed with the collapse of Lehman Brothers in September 2008, and it contributed to the Great Recession and other economic downturns around the world. It also triggered a global panic in financial markets, as investors pulled their money from banks and other institutions fearing that they might fail too.
Some people blamed the 2007-2008 financial crisis on a series of failures in risk management, ranging from the lack of regulation to the incentive for traders and investors to take risks and create unsustainable investments. But others point to long-running problems, such as monetary policies that led to excessive borrowing and rising house prices, and to cultural changes in the West, including neoliberal policies that hollowed out government and changed voter expectations.
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