Macro and Micro Causes of Financial Crisis Essay

2230 Words Apr 15th, 2013 9 Pages
Corporate and Wholesale Finance - 12BSP053

“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.

By Alistair Walters – A913910

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Five years on from the beginning of the worst financial crisis he world has seen we are still in a perils state of low or negative growth and low interest
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These low rates
120% 100% 80% 60% 40% 20% 0%
1987

effectively encouraged frivolous spending and heavy borrowing allowing people to live beyond their means. Low interest rates also increased the discount value of assets and therefore increased their value. This created a house price boom in the UK and US. It was in the US that this twined with high levels of borrowing created the subprime lending market, whereby individuals with poor or no credit history borrowed vast subs of money to buy
2001 1991 1993 1995 1997 1999 2003 1989 2005 2007

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US

UK

EU

The Causes of, and Response to, The Financial Crisis property. Lenders underwrote the loan against the value of the house with little concern for the ability to repay due to the booming property market and sold the debt as packaged securities on international capital markets spreading the debt overseas. Once the house