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Difference between Recession and Financial Crisis
One of our top priorities should be improving our financial stability. The fact that something is still possible despite the possibility of obstacles outside of our control does not diminish its importance. Recessions and financial crises may have many causes, such as excessive government actions, changes in the economy's structure, bad monetary policies, the collapse of the stock market, a currency crisis, a financial bubble, or the default of a sovereign nation.
Knowing the meaning of terms like "recession" and "financial crisis" can go a long way toward helping us learn to avoid potentially disruptive events, even if most of these causes are outside our control. Even while both recessions and financial crises slow economic growth and cause stagnation, they are not identical.
What is Recession?
This is a large decline in economic activity in a certain region or globally during a set length of time, often two consecutive quarters, as a result of extreme government actions, structural upheavals in the economy, and adverse monetary policies. This is not limited to a certain geographical area. Retail sales, industrial output, employment, and industrial sales, as well as personal income, all suffer during recessions, which is reflected in the GDP. This is the result of reduced spending that may have been precipitated by a drop in demand, a financial crisis, a drop in international trade, or the bursting of a bubble in a large part of the economy.
After the industrial revolution ended in the 1800s, economies throughout the world began to flourish. Nonetheless, there have been fluctuations in the near term, and key macroeconomic indices have either fallen or slowed before resuming their normal growth rates. This is known as a recession and often occurs just before growth rates normalize again. Even though these conditions are likely to be fleeting, they can have a lasting impact on an economy, and it may take some time for the economy to recover. In the case of a recession, governments may choose to implement macroeconomic policies, reduce taxation, or boost government spending.
What is Financial Crisis?
A combination of consumers' failure to meet their financial commitments and financial institutions' lack of liquidity has led to a significant decline in the value of assets. As a result, the value of many people's possessions has plummeted. When investors sell off their assets out of fear of a decline in price, a bank run or panic ensues, leading to massive cash withdrawals from financial institutions. This happens because of the bank robbery or the general panic.
A financial crisis can be caused by many different events, including but not limited to a precipitous drop in the stock market, a crisis in one of the world's currencies, the bursting of a financial bubble, or the default of a sovereign nation. It might affect a single economy, a group of economies, or economies throughout the world.
The following are some more causes of financial instability −
The ineluctable nature of human behavior
Contagion refers to the fear that a problem may spread to other organizations and causes widespread disruption.
Defeats at the systemic level
Failures in regulatory oversight
Leverage, wherein borrowed funds are used to make investments, can lead to a disastrous economic downturn if the borrowed funds are subsequently lost.
There are several sorts of financial crises, including but not limited to currency crises, banking crises, international financial crises, and speculative booms and crashes. Prior episodes of financial instability include the Tulip Mania of 1637, the Stock Crash of 1929, and the Global Financial Crisis of 2007-2008.
Differences − Recession and Financial Crisis
The following table highlights how Recession is different from Financial Crisis −
| Characteristics | Recession | Financial Crisis |
|---|---|---|
Definition |
In economics, a recession is defined as a significant slowdown in economic activity throughout an entire area or the entire world for a certain period of time, often two consecutive quarters. Economic downturns can affect a single country or the entire world. |
A financial crisis occurs when there is a significant decline in the value of assets, consumers are unable to pay off their commitments and financial institutions face liquidity restrictions. |
Causes |
Recessions are caused by negative monetary policies, shifts in the economic structure, or both. |
Human behavior beyond anyone's control, as well as contagion, systemic breakdowns, regulatory failures, and leverage, can all play a role in causing a financial crisis. |
Measure |
The GDP is one economic statistic that may be used to quantify the depth of a recession. |
No universal metric exists to assess the gravity of a financial crisis. |
Effects |
Recessions cause shifts in the economy as a direct result. |
Currency is vulnerable during times of financial turmoil. |
Conclusion
In economics, a recession is defined as a significant decline in economic activity during a certain time period, often two consecutive quarters. The government's drastic action, economic restructuring, and unfavorable monetary policies are all to blame.
A financial crisis, on the other hand, is characterized by a significant decline in asset values, consumers' inability to meet their financial commitments, and liquidity issues at financial institutions. It is caused by human behavior beyond our control, as well as by contagion, systemic breakdowns, regulatory failures, and leverage.
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