A financial crisis
A financial crisis, is a situation in which the money supply gets outpaced by the demand for money. It means that liquidity gets evaporated quickly due to withdrawal of money from the bank. The situation forces the bank to either sell other sell other investments or let it be and collapse. There are so many things that lead to a financial crisis. They include; market imperfection, contradiction of capitalism amongst others. This paper will discuss how both market imperfection and contradiction of capitalism leads to a financial crisis (Claessens\\" International Monetary Fund, 2014).
Market imperfection
Market imperfection is a state in which the market does not meet the demanding standards of a competitive market. It arises whenever buyers and sellers influence the prices as well as production or even when the market actors do not have the perfect information (Cullen, 2014). An imperfect may lead to market failure in the financial system. One of the activities that lead to imperfect market includes moral hazard. Moral hazard occur in a market in which individual or organizations take so many risks than they should because they know that they are covered by insurance or even the government will pay for their damagesthat occurred due to those risks.
Asymmetric information
Asymmetric information is a situation in which a party that has more information takes the opportunity of their knowledge to exploit the other party that has less or no information. This may lead to market failure. Finance is a market in information and often potential borrowers has better information on the likelihood that they will pay back the money they are requesting for than the lenders(Cullen, 2014). The other thing that leads to market failure than can lead a financial crisis is monopoly or market rigging. This happens when there is abuse of power in a concentrated market. For example, when the firms work together so that they can exploit the consumers and creates a tendency for their profit to increase. This will lead to the big firms not working hard to gain as well as retain loose customers whereas the new and small firms cannot get customers too because they are new in the market(Cullen, 2014).
The first contradiction of capitalism
The first contradiction of capitalism is stated in a simple way. It is the rate in which both the economical and sociological categories are exploited. It shows the political and sociological power over labor. It also shows the crisis of capital over production. When the capital has much power over labor, the rate of exploitation will go high leading to a higher realization on the risks (Harvey, 2010). This will lead to an aggressive market, vast credit structure, intense competition in the market and also constant production. This first contradiction of capitalism has nothing to do with the conditions for production.
In conclusion
In conclusion, both market imperfection and contradiction of capitalism lead to financial crisis. It is important for market actors to understand the market information so that no one can take advantage of their lack of information to exploit them and also those who have bigger firms should work hard to ensure they do not exploit the consumers so that they can retain their customers and also help the smaller firms develop in a positive way.
References
Cullen, J. (2014). Executive compensation in imperfect financial markets.
Harvey, D. (2010). The enigma of capital: And the crises of capitalism. London: Profile.
Claessens, S., " International Monetary Fund. (2014). Financial crises: Causes, consequences,
and policy responses.
