Outcomes of the Financial Crisis on the Economy

Financial crises bear numerous adverse outcomes on the economy of a given country. The immediate outcome of these is the limitation of credit facilities as banks and other lenders minimize their risks by minimizing their lending activities (Rötheli 2010). With such constraints on credit acquisition some firms experience explicit financial limitations thus cannot effectively run various programs planned or started prior to the crises (Campello, Graham & Harvey 2010). In their search for finances at the times of financial crises, firms could for instance face constraints such as credit rationing, increased cost of financing, and barriers to initiation or renewal of financing (Campello, et al. 2010). With these hindrances; affected companies limit their expenditures with regard to capital investment, technological advancements, marketing strategy and employment (Campello, et al. 2010). Further credit constraints lead to high utilization of available reserves thus reducing the liquidity of the companies and increasing their risk of failure in the event of prolonged depressions (Campello, et al. 2010).

These premier effects have spill-over effects such as employee lay-offs that increase the level of unemployment hence reduces the purchasing power of individuals (Campello, et al. 2010). For economic crises that have an origin in credit crunches such effects are aggravated by their widespread effect across all economic sectors thus slowing down the recovery process (Kenc & Dibooglu 2010). What complicates such crises further is their exacerbation of an already limited demand for various products thus affecting global trade that bears some connection to foreign financial institutions for aspects such as foreign currency exchanges (Kenc & Dibooglu 2010). The increased cost of financing in the recent crisis was also aggravated by financial intermediaries’ sale of assets to raise funds to finance the balance sheets that were otherwise difficult to raise through the capital markets (Kenc & Dibooglu 2010). Such drastic measures of raising funds to cover for an otherwise deficit situation in addition to high losses sustained from imprudent lending practices led to demise of many firms such as Bear Sterns and Lehman Brothers (Kirkpatrick 2009).

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