Financial crises can have significant economic consequences from "summary" of Economics of Money, Banking and Financial Markets, Business School by Frederic S. Mishkin
When financial crises occur, they can have far-reaching effects on the economy. One of the most immediate consequences is a decrease in consumer and business confidence. Uncertainty about the future leads individuals and firms to cut back on spending and investment, which can further exacerbate the economic downturn. This decrease in aggregate demand can lead to a contraction in economic output, resulting in lower employment levels and decreased wages. Financial crises can also lead to disruptions in the financial system. Banks and other financial institutions may experience runs as depositors withdraw their funds out of fear of bank failures. This can lead to a credit crunch, where banks become hesitant to lend to businesses and individuals. As a result, businesses may struggle to access the financing they need to grow and expand, further hindering economic growth. Moreover, financial crises can have spillover effects into other sectors of the economy. For example, a housing market crash can lead to a decrease in construction activity and a decline in home prices, which can negatively impact homeowners' wealth and consumer spending. Similarly, a stock market crash can lead to a decrease in household wealth, causing consumers to cut back on spending. In addition, financial crises can have long-lasting effects on the economy. The resources wasted during a crisis, such as the funds used to bail out failing financial institutions, could have been used more productively in other areas of the economy. Furthermore, the damage to individuals' credit scores and businesses' balance sheets can hinder their ability to access credit in the future, stifling economic growth.- Financial crises can have significant economic consequences, ranging from decreased consumer and business confidence to disruptions in the financial system and spillover effects into other sectors of the economy. The long-lasting effects of a financial crisis can hinder economic growth and impede the efficient allocation of resources.
