The Global Financial Crisis Of 2007-2008

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The Global Financial Crisis of 2007-2008 has been studied by several economists, and different causes have been identified, both primary and secondary, which intensified the overall impact of the crisis. In my view, the Global Financial Crisis resulted due to a culmination of several policies that interplayed with each other, and significantly influenced all sectors of the economy, from consumers to the government. In this essay, I will be addressing the main underlying causes of the crisis, how they originated, the extent of their impact, and how they compare with other financial crises. I will conclude with an analysis of policies that have been undertaken, and initiatives which should be implemented to prevent future crises. The first…show more content…
This incorrect pricing of risk and overvaluation of the bundled subprime mortgages was the fundamental cause of the crisis which slowly spread from the housing market to the money market. In 2006, when the US housing bubble burst, there was a chain reaction, which exposed the weaknesses of the financial system. The values of the securities tied to the US real estate pricing (MBS and CDOs) slumped, causing the collapse of financial institutions, and bailout of banks by their governments. Going back to the roots of the cause that led to the global damage of these financial institutions - First, most banks and insurance companies had insufficient capital holdings to back the financial commitments that they were making. The whole financial system was built on unstable foundations. Banks had allowed their balance-sheets to expand but set aside too little capital to absorb losses. Second, central bankers and other regulators failed to keep economic imbalances in check and did not exercise proper oversight of financial institutions. There was excessive deregulation of OTC Derivatives especially Credit Default Swaps. Thus, when housing prices collapsed, it undermined the value of the multitrillion-dollar pool of lower-value mortgages that had been created over the period from 2003 to 2006. Finally, both sellers and buyers engaged in questionable trading practices of complex financial products and risky investments,
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