A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution.

Dotcom bubble: In 2001, the U.S. economy experienced a mild, short-lived recession. Although the economy nicely withstood terrorist attacks, the bust of the dotcom bubble, and accounting scandals, the fear of recession really preoccupied everybody's minds

To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy. Cheap money, once out of the bottle, always looks to be taken for a ride. It found easy prey in restless bankers - and even more restless borrowers who had no income, no job and no assets.

The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years. The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment.

Then the Federal Bank lowered interested rate to 1% what means that investors resigned from buying Treasury Bonds from them and started looking for better investments. On flip side that meant that banks form wall street could borrow from the fed from only 1%. Everyone went crazy with leverage which is a major thing banks make their money. Wall St went crazy rich and some investors watching things wanted a piece of it.

Then they came up with idea to connect the investors with customers: customer is taking a mortgage, which is later sold to the investor with a really nice fee. Bank gets his money and it’s happy. Then investor takes a huge loan and buys hundred of morgages and puts them in a box. Then he kinda makes his financial magic and cuts it into three pieces “safe” “ok” and “risky”. Then they put It back to the box and call the collateralized debt obligation (CDO) which they sell later to some other investors.

Since everyone liked this idea and wanted to invest in something like that, America started missing customers, so they started to giving out extremely risky subprime morgages – if they default in the mortgage the investors are getting a house that is always increasing in the value. But at some point investors had to little customers that are paying and too much houses, so they start losing their value. Investor now has a box full of worthless houses and he tries to sell it, but none is willing to buy his bond. The whole financial world is frozen and then everyone goes bankrupt.

It is told that this crisis is the biggest since the one in 1930s.

GOVERNMENT RESPONSE TO FINANCIAL CRISIS

There is no ‘commonly accepted theory of financial crisis’ to provide fail-proof advice on the correct policies that each particular country should adopt in the wake of the crisis. However, from past experiences of financial crises and given the analysis of the origin and likely impacts of the current crisis, the likely responses required in developing countries would need to include immediate, short-term (stabilization) and long-term (structural) policy responses

The Dodd-Frank Wall Street Reform Act was the most comprehensive financial reform since the Glass-Steagall Act. Like Glass-Steagall, it sought to regulate the financial markets and make another economic crisis less likely

It was introduced by Senator Chris Dodd on March 15, 2010 and passed by the Senate on May 20.

The bill was revised by Congressman Barney Frank and approved by the House on June 30. On July 21 2010, President Obama signed the Dodd-Frank Wall Street Reform Act into law

Dodd-Frank proposed eight areas of regulation. Here are the major parts of the Act.

Regulate Credit Cards, Loans and Mortgages

The CFPB regulates credit fees, including credit, debit, mortgage underwriting and bank fees. It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It also requires banks to verify borrower's income, credit history and job status

Oversee Wall Street:

The Financial Stability Oversight Council looks out for risks that affect the entire financial industry. It also oversees non-bank financial firms like hedge funds. If any of these companies get too big, it can recommend they be regulated by the Federal Reserve, which can ask it to increase its reserve requirement.

Stop Banks from Gambling with Depositors' Money:

Dodd-Frank gave banks seven years to divest the funds. They can keep any funds if that are less than 3% of revenue. Banks have lobbied hard against the rule, delaying its implementation until at least 2013.

Regulate Risky Derivatives:

Dodd-Frank required that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). In this way, excessive risk-taking can be identified and brought to policy-makers' attention before a major crisis occurs.

Bring Hedge Funds Trades Into the Light:

One of the causes of the 2008 financial crisis was that, since hedge funds and other financial advisers weren't regulated, no one knew what they were investing in or how much was at stake. To correct for that, Dodd-Frank says that hedge funds must register with the SEC and provide date about their trades and portfolios so the SEC can assess overall market risk. States are given more power to regulate investment advisers, since Dodd-Frank raises the asset threshold limit from $30 million to $100 million.

Reform the Federal Reserve:

The Government Accountability Office(GAO) was allowed to audit the Fed's emergency loans during the financial crisis. It can review future emergency loans, when needed. The Fed cannot make an emergency loan to a single entity.

Iceland

Why McDonalds? Because of devaluation of islandic currency the Island become one of the few countries that the company closed it’s restaurants and left.

What actually happened? Iceland was the first really loud case, we can say first victim of financial crisis. It had three biggest banks: Kaupthing, Glitnir i Landsbankinn, which in 2008 had debt of 85 billion dollars with GDP 12 billion usd dollars. Unemploymnt increased three times up to approximately 9% and inflation during the crisis was 20%.

But they didn’t try to save the banks: they let them bankrupt immediately and started looking for people guilty for it. Banks were nationalized and the previous directors were arrested and brought to court to answer for abusing their power.

Last year the unemployment was 6% and was going down.