Financial Crisis Outlook for 2014
When there is a loss of confidence in financial assets, investors around the world sell them at the same time, which results in a financial crisis. These assets will, of course, be worth a fraction of what they were before the crisis. Financial institutions that own these assets may not have enough money to cover them. This causes financial institutions to reign in lending because individuals have little or no liquidity; without available credit, the economy contracts.
This is how a financial crisis translates into an economic contraction. This is why governments step in to provide liquidity to the banks (quantitative easing) in order to keep the economy from further contracting on itself. A financial crisis can bring an economy to its knees. The government’s job is to mitigate a loss of confidence in the first place, because this is what triggers a financial crisis.