What are the Common Impacts of Financial Crisis?

Mary McMahon

Common impacts of financial crisis can include increased poverty, decreased innovation, and increased government debt. A large financial crisis does not just create problems for all members of society in the short term; it can also create a lasting legacy of financial difficulties that may take generations or decades to repair. The Great Depression of the 1930s in the United States provides an example of the lingering impacts of financial crisis.

One impact of a financial crisis is a widening gap between rich and poor.
One impact of a financial crisis is a widening gap between rich and poor.

In an ongoing financial crisis, one of the most obvious impacts is a reduction in the availability of credit. This tends to set off a chain reaction. Businesses have trouble financing their activities, government debt may increase as governments attempt to help stabilize the economy, and markets will slow as everything from home buying to stock trades slumps in response to limited credit. Unemployment tends to spike because less money is available to pay people, and people have less to spend, creating a cycle of unemployment and tightening market conditions.

A spike in unemployment, such as was seen during the Great Depression, is a common impact of a financial crisis.
A spike in unemployment, such as was seen during the Great Depression, is a common impact of a financial crisis.

This also has long term effects. Companies may not be able to invest in development of new products and services, creating a dip in innovation, while individuals may have trouble paying for college and making other investments in their future. A financial crisis can create a future crisis in the form of fewer educated professionals because young people may pursue alternatives to college and technical school to support themselves during the crisis, and never return to school.

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The middle class tends to experience severe hardship when the economy dips. One of the common impacts of financial crisis is a widening gap between rich and poor, which can create political unrest. It may also result in increasing reliance on government assistance during a period when the government does not have very much money to spare for unemployment benefits and social services.

Living through a financial crisis can create permanent behavioral changes, contributing to the long-term impacts of financial crisis. Studies on survivors of the Great Depression show that they spent money differently from others and tended to have different borrowing and saving habits. They were also more prone to mental health problems like depression; one of the less tangible impacts of financial crisis can be an uptick in mental health conditions associated with stress and hardship.

In the long term, a financial crisis can cause serious problems for developing nations as well. They may not be able to access aid and assistance from the developed world, and this could create political instability as residents of these nations start to rebel in the poor economic conditions. It can be difficult for these nations to fund public works projects and other activities, and this may create generational gaps just as in developed nations, where people who lived through the peak of the crisis may have poorer health and fewer job opportunities.

The impacts of financial crisis are not all bad. Innovators who can predict market movements and raise capital may be able to create a niche market for themselves. Adaptable participants in the market may make their own mark in the wake of the crisis, creating successful businesses capable of weathering all market conditions.

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