Assessment Type: Assignment – 2,000 words essay response and one analytical response - individual assessment. Purpose: Understanding of global financial market and crisis. Identify and analyse the...

Global Financial Crisis of 2007 – 2009
Introduction
The Global Crisis is the Financial crisis of 2007 – 2009 which shook the entire world economy. The crisis begun in 2007 in the subprime mortgage market in United States. But soon the impact was seen by the entire world with the failure of the leading investment banks Lehman Bank. One of the biggest investment bank Lehman Bank collapsed on 15 September 2008. The bank collapsed due to the excessive risk taking and the impact magnified to the global economy. This crisis came to be known as Great Recession. Major cause of 2008 crisis was subprime mortgage crisis which was caused by the unregulated use if the derivatives. The impact of the crisis was severely felt by the developed economies like North America, South America and Europe. Although the countries like China and India were able to survive the crisis in a better way and infact they grew due to this crisis.
Causes of the crisis
· Political Instability
According to Raghuram Rajan there was political instability in United States. The reason for political instability was unequal access created for different segments of the society due to the deficiencies in structure. To deal with the inequality, politicians of both the parties began to use ownership of homes as a way out. This encouraged the banks to lend more loans for housing purpose with the minimum requirements of underwriting. Therefore, the risky lending started to begin and this led to riskier mortgage lending since the mortgages themselves did not have any value.
· Subprime Lending
In 2000, due to the subprime borrowers, credit lending standards were relaxed by the commercial and investment banks. Suring this time the mortgage lenders were competing against each other for the increase in revenue and market share. Due to the increasing competition, the lenders were forced to resort to the risky mortgaged lending. Amidst the competition, the lenders started to lend to the less credit worthy borrowers. Between 2004 – 2007, most risky loans were generated by the government sponsored enterprises.
All the GSE’s were relaxing the standards and requirements of the loans to compete against the private lenders. Finally, because of the risky lending, the mortgages were existing only on papers which did not carry any value and thus the market crashed and banks did not have any source to get the money.
In 2003, The Federal Bank lowered the interest rate to 45% which was the lowest interest rate in last 45 years. This came as good news to people who wanted their dreams to come true. People could borrow the loan at low interest rate and pay later. But no one knew about the consequences. As a result, bankers thought that it is not enough what is lying on their shelves. Thus, they put the loan to collateralized debt obligations (CDO) and sold to another person. Therefore, soon the secondary market was developed for these CDO.
· Housing Bubble
In United States, the prices of real estate was increasing as much as by 124% between 1998 and 2008. The main reason for the growth in prices was that no one imagined that real estate sector can ever fail. Therefore, everyone thought the real estate as a safe bet and prices surged drastically in a few years.
But in 2008 prices dropped by 20% and borrowers could not refinance the amount to pay the high interest rates and thus borrowers started to default.
Timeline for 2008 crisis
Feb 1, 2007: Peak of Home Sales
Home sales were at peak with annual rate of 5.79 million in Feb 2007. But the prices already started to fall in 2006 due to rise in Federal Reserve interest rate. If there is a price decline of 10 – 15%, then it was enough to eliminate the equity of the owners of the houses. But the economists didn’t think that the prices may fall to that level. Also, the owners started to sell their homes at losses and not went to refinance.
Mar 6, 2007: Stock Market Rebound
The Dow Jones Index had dropped for approximately 600 points since February. But on March 6, 2007 the index surged by 157 points which is 1.3%. This made people think the everything was fine in the economy. But at times, these swings can...