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Financial crises occur in most organizations and financial institutions world wide. In America, this got evidenced in 1929 and still the effect of this exists. The financial crises involve tension in the economy and loss of countries paper value. Many individuals have put up ways to prevent this from happening in their organizations. Many theories have been established to explain how crises develop, and means of prevention, but still the problem remains unsolved. Examples of financial crises include currency crises, banking panic, stock market crashes and growth of other financial bubbles (Paul, 2006).
There many event which happened in America in 1929, which showed that financial crises could not occur. St. Valentine’s massacre occurred in February 14th a total of 200,000 died from influenza epidemic. After sometime, America signed a treaty with Canada which involved protecting the falls of Niagara. After that the American population raced significantly. Many states gained independence, and in the some year, the Wall Street crash occurred. This was the stock crash, and it occurred to October and existed up to the mid of 1930. Inventions took place new products got manufactured, and the economy of America seemed to increase. New music got produced, students got better grades and academic awards, and finally the invention of softy drink took place. This showed that financial crises would not occur again in America (Maurice, 1996).
Technology advanced, and new communication facilities got invention. New political leaders emerged, and they improved the systems of transport and communication. The improvement which took place showed that the financial crises could not occur again in America but despite this in 2008 they evidenced a significant loss of bank paper value. The American dollar lost value, and the prices went high. America started importing products from other countries on a higher price (Paul, 2006).
Banks run occurs when the investors or the depositors withdraw much than the deposited they make in a certain Period. The run leaves the bank in bankruptcy, because withdraws made makes the investors not able to deposit the same amount for compensation. There many terms use to differentiate different banking crises. The time when the bank run occurs in many places is called a banking panic. Credit crush occurs when the bank has little money left after depositors withdraw the cash. In America bank run have been evidenced, in 1931 their banks which suffered they could not get finance to facilitated their daily operations. In 2008 Baer Stearns got a classification of bank run (Paul, 2006).
Causes of financial crises
There many reasons which made America have financial crises in 2008. Leverage caused financial crises in banking institutions. This is borrowing of money to financial investments. Financial institutions borrowed money to invest in their market and develop their earnings, but they could not race the money to repay the loans. This spread financial troubles from one bank to another. They borrowed each other and the whole region had financial crises, which led to loose of paper value. Money comes from the banks and the procession of money at this time made the banks raise the value of the currency which brought about financial crises (Maurice, 1996).
Asset liability mismatch contributed a lot in financial crises. This affects the banks and brings about bank runs. The amount withdrawn does not match with the asset value deposited. The bank in America failed in 2008 because they could not withdraw their funds and renew their short term debt. The bank financed long term loans with investors bringing out their houses and properties as security. The other issue associated with financial crises is the application of fraud by the employees and customers. Most of the employees in banking sectors defrauded the banks. All individuals determined to provide funds for their development, and this led to a big loss which brought about financial crises (Paul, 2006).
Application of theoretical models in organizations
There various theoretical models, which can assist in checking the response 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 the issue while not minding the situation which existed. Closed natural system model focused on international organization but concentrated to human relations. Many individuals, works with their friends to solve their financial crises (Maurice, 1996.
Open rational system model led to the establishment of many theories, which assist the growth of the organization. Organizations like banking sectors and non governmental agencies have established structures which assist in the operations and prevention of financial crises. Finally, open natural system models, has many theories, which opposed that the organizations behaves rationally. The organizations work towards development, and they do not choose to have financial crises. The models apply in much organization, 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 occurring. The banks should regulate the transfer of money to the depositors. Financial stability makes the country to grow economical and reduce the level of poverty.