Causes of the financial crisis

In this essay, I will briefly explain what happened during the financial crisis of 2007-09, and also discuss the contribution of the government to the financial crisis.

The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Considered by many economists to have been the worst financial crisis since the Great depression of the 1930s. Economist Peter Morici coined the term the “The Great Recession” to describe the period. While the causes are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in the trillions of dollars range), substantial government intervention across the globe, and a significant decline in economic activity. Both regulatory and market based solutions have been proposed or executed to attempt to combat the causes and effects of the crisis.

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

“There are many factors that led to the build up of the crisis. At the top of the list is excess liquidity, resulting in too much credit and weak underwriting standards. The vulnerability of the banking

The underlying problems that caused the financial crisis of 2008 began building before many economists and policymakers are willing to admit. Since the laissez-faire policies of the Reagan administration in the 1980s, inequality and unemployment heightened. “Between 1976 and 2006 (...) ation-adjusted per capita income increased by 64 percent, for the bottom 90 percent of households it increased only by 10 percent. For the top one percent of households it increased 232 percent,” (Wisman 2013, 932) causing an income gap. Another arsing issue was globalization after World War II. The economy’s structure changed and outdated previous economic policy. Manufacturing jobs were outsourced because labor was cheaper abroad; the US imported more goods than it exported, causing a trade deficit.

“Since 2007 to mid 2009, global financial markets and systems have been in the grip of the worst financial crisis since the depression era of the late 1920s. Major Banks in the U.S., the U.K. and Europe have collapsed and been bailed out by state aid”. (Valdez and Molyneux, 2010) Identify the main macroeconomic and microeconomic causes that resulted in the above-mentioned crisis and make an assessment of the success or otherwise of the actions taken by the U.K government to resolve the problem.

Mortgage rates in the United States hit an all-time high in the early 1980’s at 18% in order to combat and push inflation out of the economy. Over the next 20-25 years, interest rates continued to fall and even fell below 6% in 2002. Although there was a large amount of debt going on in the United States at the time with little to no saving habits, interest rates were kept low by large amounts of investments into the U.S housing markets from outside countries like China, Japan, Brazil and the United

-1. How could the Federal Reserve prevent and solve financial crisis? – The function of Federal Reserve.

It is undeniable that the political has a great impact on the finance crisis in 2008. In this journal, the writers have brought up the practical reasons causing the biggest recession in the world. However, the root cause of the financial crisis stemming from the credit crisis and real estate in America. Real estate bubble increasingly growing had put the housing market in the USA and many European countries in danger. Cheap credit was the starting point for the real estate bubble, following by the imbalance of monetary policy of the U.S. Federal Reserve. Furthermore in 2007, a number of American credit institutions such as New Century Financial Corporation had processed procedures for bankruptcy. Some are leaving the depreciation of its shares

A second probable cause was the great expansion of investment trusts, public utility holding companies, and the amount of margin buying, all of which fueled the purchase of public utility stocks, and drove up their prices. Public utilities, utility holding companies, and investment trusts were all highly levered using large amounts of debt and preferred stock. The third being economic prosperity leading people to believe the market could only grow causing carelessness of people and banks with money investing beyond capable of what they had. People would invest in stocks, banks, and corporation then the banks and corporations would also invest in stocks the stock ended up affecting everyone. International trade declined 30% and nations tried to protect their industries by raising tariffs on imported goods. The Federal Reserve decided not to bail out banks to prove a point for banks not to over invest depositor’s

According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked

Just after ten years of Asian financial crisis, another major financial crisis now concern for all developed and some developing countries is “Global Financial Crisis 2008.” It is beginning with the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and spread like a flood. At first U.S banking sector fall in a great liquidity crisis and simultaneously around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. (Global issue)

Therefore, I found it quite interesting to read about the financial crisis and the background of it i.e. that it goes back to the 1990s in Helleiner’s article Understanding the 2007-2008 Global Financial Crisis. According to Helleiner, Strange warned about the crisis back in 1998

In 2007, as the housing bubble in the US burst and a liquidity crisis began, financial markets around the world were sent into mayhem. The global financial crisis (GFC) had begun, and was setting out to be the deepest recession since the Great Depression of the 1930s. The GFC was resultant from unbridled greed by the bankers including the issuing of risky mortgages, the inability of relatively poor consumers to manage their mortgages, inadequate regulation of the financial system, as well as a long term slowing down in the vigour of the advanced economies (Bramble, 2011). But how did this crisis impact upon global trade? What were its repercussions on global growth and movement? And how did the global economy, as well as domestic

“A complex network of financial derivative products held globally, started to un-ravel, US mortgage crisis was only the tip of the iceberg”.