Financial crises can have devastating effects on economies from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
Financial crises have the potential to wreak havoc on economies, causing widespread damage and long-lasting consequences. These crises can disrupt the normal functioning of financial markets, leading to a sharp decline in asset prices, a collapse of credit markets, and a severe contraction in economic activity. As a result, businesses may be forced to cut back on investments, lay off workers, and reduce production, leading to higher levels of unemployment and lower levels of output. Moreover, financial crises can erode confidence in the financial system, causing a run on banks and other financial institutions as depositors rush to withdraw their funds. This can trigger a chain reaction of bank failures and further exacerbate the crisis. In extreme cases, governments may be forced to step in and provide financial support to prevent a complete collapse of the banking system, leading to a sharp increase in public debt and fiscal deficits. The effects of financial crises are not limited to the financial sector; they can spill ove...
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