The Cause of Global Financial Crisis

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Ⅰ the causes of global financial crisis

1、Boom and burst in the housing market

Low interest rates and large inflows of foreign funds created easy credit conditions. Subprime lending contribute to increase the housing demand.This fueled rising house prices.This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates. This led to a building boom. Easy credit encouraged borrowers to obtain ARM. If borrowers could not make the payments ,they would try to refinance. Refinancing became more difficult, when house prices began to decline in USA. Borrowers found themselves unable to afford higher monthly payments ,then default. This places downward pressure on housing prices.

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Ⅱ Explain how the subprime crisis of the US spreads to the whole world?

The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe.

• First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and so on.

Also, since global equity markets are closely interlinked through institutional investors, financial crisis affecting these investors sees a contagion effect throughout the world. The panic psychology takes over and a large number of people cash in their chips. This disturbs global financial market further.

For emerging market countries, in the first place, the crisis derived from the setback in exports of goods and services to the European and American countries, but not the collapse of the banking system. People claims that the model of crisis transmission in USA is from virtual economy to real economy, however, the harsh
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