A financial crisis has happened with regular intervals throughout the last century, it happens again in the years 2008-2009, and probably will happen in the future in much the same way. There is no fundamental differences between such crises in our time and former crises, except perhaps that they occur faster, occur more frequently, but fortunately also heal faster.

The Situation just before the Crisis

The crisis often occurs after a long period of economic growth, high employment and high activity. The situation for companies and individuals are typically as follows:

• The economic activity in the whole society is very high after a long period of growth, but is beginning to decline.
• Stocks are traded for historically high quotes after a long period of rise of 300% or more, they have reached an all time high level, but they are beginning to decline again.
• The prizes of real estate properties are also high after a long period of growth, 300% or more, but they also are beginning to decline after an all time high level.
• Companies are often over-established after aggressive investments for borrowed money. The investments have not yet shown profitable, but the companies estimate great profits from the investments because they think the general growth will continue uninterruptedly.
• Also the average individuals have high debts after having invested massively in their homes and in luxury objects. They have some beginning problems with payment on their debts, but think these problems soon will go away with an anticipated further rises of personal income.

The Initial stage of the crisis

The crisis usually has a slowly developing initial face. This initial face is triggered by consumers and companies realizing that they are not able to handle any more dept, that they therefore have to stop lending money and must reduce their consume and investment activities.

During this period there is a moderate decline of industry orders, of company revenues and of employee salaries. People now also realize that stocks and properies are much higher prized that they are worth. As a consequence there is also a decline in stock market quotes and real estate prizes.

But this initial decline of economic activity causes a further decline in the revenues and salaries to a point when many compamies and consumers are not any longer able to handle their allready established dept. When this occurs for a certain persentage of the actors in the society, for example 10 percent, there occurs a critical turning point leading into the development of a full blown crisis that it is impossible to recover from in an easy way.

The further stages of a Full-Blown Crisis

The full-blown crisis has these properties:

• People reduce their consume and purchases abruptly and massively.
• The activity and earnings of companies are abruptly declining.
• Many companies experience massive losses.
• The number of companies and individuals with debt trouble is abruptly rising.
• The number of bankruptcies is abruptly rising.
• The unemployment level rises abruptly.
• Now there will be massive sell-offs of properties and stocks. The sell-offs are exerted by individuals trying to free themselves from some of their debts and by banks trying to stop losses on loans.
• The quotes of the stock market crack down 60% or more driven by the massive sell-offs. This crack will typically occur in several stages with short periods of rizing quotes between.
• The real estate market also cracks down 60% or more due to massive sell-offs, but usually somewhat later and more slowly than the stock market.
• Banks get into serious squeeze due to customers unable to pay on their debts and due to the decline in the value of properties serving as security for the loans.
• The troubled banks have to rise the interest rates by many percent to counteract the losses. But this act only increases the problems for other banks, individuals and companies and accelerates the crisis.
• A high percentage of the banks get unfunctional and bankrupt.

In the end stage of a full blown crisis, the production of goods and services it the whole society can be reduced as much as 30%, and the unemplployment rate can reach up to 30%.

The end of the Crisis

Before the crisis can end, all sell-offs to pay back on loans must be fulfilled. Then every actor in the society has to accept their losses. Debts that actors are not able to pay back must in some way be nullified. Then all the pieces remaining of the former companies must be fixed together again into new functional units. Then the society can slowly rebuild its strength.

The causes of the Crisis

An important cause of the crisis are over-optimistic companies and individuals during the foregoing period of economic growth. They tend to believe that the general growth will continue forever without interrupting periods of economic decline. They also tend to overestimate themselves and think they will be a winner in the competition against other companies or persons, not a looser, not an average performer, but the winner.

This optimism, which is a general human property, make all actors borrow massive amounts of capital and invest them in homes, luxury objects and expansion of their business. This expansive behaviour tend to accelerate for quite a long time untill in meets the wall.

Another cause are executives in banking companies tempted to lend out as much money as possible to the borrowers, regardless of the consequences for the bank and the borrowers, because this behaviour gives the executives an enormous short term personal gain.

How to avoid financial crisis

Future crises can only be prevented by hindering financial institution lending out more money to anyone that the borrowers can pay back in a comfortable way. This can only be done by governmental regulations that set clear criteria that must be fulfilled when a certain amount of money is lent out.

Also banks must be forbidden to establish employment contracts for their executives that reward them directly for the amount of mortgages they establish.

Knut Holt is an internet marketer and consultant focusing at technical, health and scientific items. To find items like car equipment, remote control models, airsoft guns, chemistry sets, electronic kits and components, microscopes, binoculars, night vision instruments, music instruments, computers, PDAs and more:  Visit http://www.mydeltapi.com