Question

Regarding the 2007-09 Financial Crisis, Was this a systemic or a nonsystemic crisis? Explain. How do these differ?

Answer 1

A systemic crisis is a crisis in which the event at a company level can trigger instability in the industry or in the economy. Where as non systemic crisis is a crisis in which only few companies or a sector is affected and not the economy.

Initially, the 2007-09 Financial crisis was a non systemic crisis which began with subprime mortgages or risky loans. As the housing prices fell, the homeowners with dubious credit and negative equity began to default in unexpectedly high numbers. Highly leveraged financial institutions could not absorb the losses and had to shut down or be absorbed by stronger institution . Later on, in 2008 failure of major financial services companies despite FED's effort, turned it into a more severe systemic crisis following the failure of Lehman Brothers and AIG.