1. Explain the causes of the global financial and economic crisis that started in the U.S. in 2007. 2. What effect did it have on the global economy? 3. How did the global economy recover? 4. What...

Running Head: EXPLORING GLOBAL FINANCIAL CRISIS OF 2007    1
EXPLORING GLOBAL FINANCIAL CRISIS OF 2007    2
EXPLORING GLOBAL FINANCIAL CRISIS OF 2007
Table of Contents
1. Causes of Global Financial and Economic Crisis in USA in 2007    3
2. Effect on Global Economy    4
3. Recovery of Global Economy    5
4. Monetary and Fiscal Policies Implemented    6
5. Challenges Remaining for Global Economy    7
References    8
1. Causes of Global Financial and Economic Crisis in USA in 2007
    Although initiated from the United States Housing Industry, the financial crisis was a global event. As described by Swan (2019), the Black Swan theory proposes the idea that occurrence of Global financial and economic crisis in 2007 that started in USA was a rare event that took place once-in-a-century and therefore, cannot be traced, subjected to causes and prevented by regulations. Despite the vast claims of Black Swan theory, a critical lens of the prior and post events of Global financial crisis, it can be seen that there were major causes that led to the debacle.
The first reason was the Imprudent Mortgage lending. As noted by Mason (2015), after the financial slowdown in the early 2000s, the Federal Reserve in USA allowed higher lending at lower rates. The system became very complex as investors poured in their money, in a completely opaque financial system that has unidentified risks. The higher lending and lower rate made customers buy assets beyond their normal capacity and as the loan rates grew back, they started defaulting.
    Secondly, the role of human greed was a major cause of Global financial crisis. As observed by Alm and Leguizamon (2018), investors in US started huge investments in housing industry instead of Federal Reserve fix deposits, due to their craving for high returns. The lack of transparency and centralized legislature made mid-level agents, rating agencies, brokers and contractors earn huge profits without much risk and morale responsibilities. The high profit also encouraged them to sell risky bonds, projects and houses to banks, customers and investors.
Thirdly, the role of the rating agencies made the flaws of the system hidden. As mentioned by Griffin (2019), the rating agencies, which had only a few years of data for market predictions and used bad computer models for their data processing, offered predictions that were good for a short-term of 2 to 5 years, but not suitable for long-term investments, resulting in market collapsing. In addition, the inconsistency of the loan interest rates, the government preference for approving sub-primal loans and allowing of non-banking institutions to take part in the system were also significantly relevant for the Global financial crisis.
2. Effect on Global Economy
    As the US Federal Reserve lowered the bank interest rates, national as well as foreign investors invested huge amount of money for lending and expected rapid growth of the sector and high profiting return. As the banks got hold of the mortgaged papers of the houses, they sold those papers to foreign financial bodies as a form of mortgage bank securities in bundles (Nier & Merrouche, 2010). The foreign investors buying mortgaged bank securities thought the deals were very profitable and in case the borrower fail to pay the loan, the assets will be sold at a higher price in the market, recovering more money than invested.
As mentioned by Begenau (2018), considering the low risk in a profitable sector, investors invest huge amount of money without considering the potential risk yet to be identified. As the number of defaulters increased huge number of houses were put back in the market for reselling and recovering of the investors’...