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Financial crises occur in most organizations and financial institutions world wide. In America, this was evidenced in 1929 and its effect still can be felt. The financial crises involve tension in the economy and the loss of value of a country’s currency. Many individuals have developed ways to prevent this from happening in their organizations. Many theories have been established to explain how crises develop, and means of its prevention, but still the problem remains unsolved. Examples of financial crises include: currency crises, banking panic, stock market crashes, and other financial bubbles (Paul, 2006).
New events in 1929
There were many events which happened in America in 1929, which showed that financial crises could not occur. St. Valentine’s massacre, which occurred on 14th of February, resulted in a total of 200,000 died of influenza epidemic. After sometime, America signed a treaty with Canada that involved protection of the Niagara Falls. After that the American population raced significantly. Many states gained independence, and in the same year, the Wall Street crash occurred. This was the stock crash, which occurred in October and continued up to the mid-1930s. Since then, many inventions took place, new products got manufactured, and the economy of America seemed to increase. Moreover, new music got produced, students got better grades and academic awards, and, finally, the invention of soft drinks took place. This showed that financial crises would not occur again in America (Maurice, 1996).
Technology advanced, and new communication facilities got invented. New political leaders emerged, who improved transportation and communication systems . The improvements, which took place, showed that financial crises could not occur again in America but, despite this, in 2008 they evidenced a significant loss in the economy. The American dollar decreased in value, and the prices went high. America started importing products from other countries at a higher price (Paul, 2006).
Banks run occurs when the investors or the depositors withdraw more than they deposited in a certain period of time. The run leaves the bank in bankruptcy, because of withdrawals made it makes the investors not be able to deposit the same amount for compensation. There are many terms used to differentiate banking crises. The time when the bank run occurs in many places is called as a banking panic. Credit crush occurs when the bank has little money left after depositors withdraw cash. In America, bank runs have been evidenced in 1931; their banks, which suffered, could not get proper financing to facilitate their daily operations. In 2008, Baer Stearns developed a classification of bank runs (Paul, 2006).
Causes of financial crises
There many reasons which made America experience financial crisis in 2008. Leverage was the cause of financial crisis in banking institutions; this is due to borrowing of money for financial investments. Financial institutions borrowed money to invest in their market and generate their earnings, but they could not earn enough money to repay their loans. This spread financial troubles from one bank to another. They borrowed from each other and the whole region had experienced financial crisis, which led to depreciation of currencies. Money comes from banks and the procession of money at this time made those banks to raise the value of the currency which brought about financial crises (Maurice, 1996).
Asset liability mismatch contributed a lot to financial crisis. This affects the banks and brings about bank runs. The amount withdrawn does not match with the asset value deposited. The banks in America failed in 2008 because they could not withdraw their funds and renew their short term debts. The banks financed long term loans with investors using their houses and properties as security. The other issue associated with financial crisis is the application of fraud by the employees and customers. Most of the employees in banking sector defrauded the banks. All individuals were determined to provide funds for their development, and this led to a big losses which brought about financial crisis (Paul, 2006).
Application of theoretical models in organizations
There are various theoretical models, which can assist in checking the responses of many organizations on financial crises. Closed rational theory, a theory by Taylor, Weber, and early Simon, perceive organizations as an instrument to achieve present end while ignoring the environment. Many organizations like banks despite the financial crises worked hard to solve their issues while not thinking of the situation which existed. Closed natural system model is focused on international organizations but concentrated on human relations. Many individuals work with their friends to solve their financial crisis (Maurice, 1996).
Open rational system model led to the establishment of many theories, which assist the growth of the organization. Organizations like in banking sector and non-governmental agencies have established structures which assist in the operations and prevention of financial crises. Finally, open natural system models have many theories, which opposed that the organizations behave rationally. The organizations work towards development, and they do not choose to have financial crises. These models apply in the most organizations, both governmental and non-governmental (Paul, 2006).
Financial crises bring down the economy of a country, and each organization should work towards prevention of such activities from emerging. The banks should regulate transfers of money to the depositors. Financial stability makes the country’s economy to grow and reduce the level of poverty.