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Global Financial Crisis
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Global Financial Crisis
Introduction
Financial crisis can be said as the structural breakdown of the economic system which may have occurred due to various reasons. It may be because of the currency crisis, the debt crisis, the payments crisis or other crisis which has incurred in the country or the globe. The currency crisis can incur due to the economic downturn in the economy and can affect the flow of currency within the nation as well as internationally. The countries have faced different financial crisis over the period. One of the most recent financial crisis was the sub-prime crisis of the year 2008, which affected the global economy and the countries immensely.
The Global financial crisis of the year 2009 was considered to be one of the most catastrophic incident of the time which was considered to be a series of boom bust regulate deregulate boom bust cycles. The impact of the financial crisis moved from the financial aspect to the economic and then to the socio-economy cost. It has been a biggest threat to the survival of the world in years to come. It has affected the countries to a wide extend.
The sub-prime crisis was one of the biggest financial and economic crisis in last 80 years which impacted the whole world. The financial crisis began at the sub-prime sector of the securitized US mortgage market. (Begg. I., 2009)
Before that there have been different global financial crisis and great depression which has also affected the economies of the countries worldwide. Usually, it is said that the recession lasts from 6 months to 18 months while some of the greatest financial crises of the world has been quite long. The great depression which hit the world in the year 1929 lasted for 43 months and had severely affected the economy as well as employment rate. The unemployment in the year 1929 surged to 25% while the GDP during that period contracted by 28%. (Corden, Max, 2008)
The recession which incurred in the year 1980 lasted for 16 months and also affected the economy across the world slightly.
Possible causes of Global financial crisis
The impact of the financial instability was majorly because of the lax monetary policy. There were different regulatory components that were missing and encouraged the leverage and maturity transformation by the banks. The global crisis originated in the developed countries which was sparked by the excess borrowing costs of the developing countries as well as the fall of the currencies. The crisis began in the end of the year 2007 where the home owners had borrowed finance to finance their properties which they had bought. The people also had poor creditworthiness and still they were given substantial amount of loan because of the amount of liquidity the banks had and also the low level of interest rate. This resulted in number of defaulters who were not able to pay off the loans and it followed the sub-prime crisis which resulted in financial crisis across the globe.
The US house prices declined considerably in the year 2007 which led in the increase in loans to a great extent. The big lenders were dangerously exposed to the high risk loans market. With the mortgage backed assets, the value of assets owned by the banks were quite less than the loan that was taken by the people.
There were different dominant companies which declared themselves bankrupt like Bear Sterns, Lehman Brothers and AGI.
The major reason for the sub-prime crisis was the complex nature and contents of the financial structure which was present in the economy. The extent of the mortgage lenders led to this crisis. With the sub-prime crisis the whole financial system collapsed and resulted in financial crisis at a very high magnitude.
Scale and impact of Global financial crisis on different countries
The financial crisis of the year 2007 and 2008 has put considerable pressure on the firms globally and have affected the economy worldwide. It made a lasting impact on the World Economy. It highly impacted the monetary integration of...