Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Economic Tsunami

What it is:

An economic tsunami is a set of circumstances that produce an event that triggers considerable distress in the financial markets and/or the economy.

How it works (Example):

In the meteorology world, a tsunami is a wave or series of waves caused by the movement of a large body of water. Typically, a tsunami can be tens of feet high and washes ashore, destroying buildings and killing many.

The 2008 subprime mortgage crisis that led to an economic crisis in the United States is one example of an economic tsunami. When homeowners continued to default on mortgages, the mortgage-backed securities based on those mortgages began defaulting, and the insurance companies that covered those securities could not cover the rising claims. Additionally, rising unemployment caused a drop in spending, which caused many businesses to go under or lay off more employees, worsening the crisis.

Why it Matters:

Though our example is a simplified version of the 2008 economic crisis, the point is that a series of displacing events created a few large waves that washed over the economy and left devastation behind. Eventually, the U.S. economy began to rebuild, and like many tsunami-afflicted areas, the new construction is often stronger than the last.