Academia Test: Global Economic Crisis and Their Causes and Consequences

Topics: Great Depression, Subprime mortgage crisis, Unemployment Pages: 4 (1248 words) Published: January 27, 2013
Running Head: Global Economic Crisis: Causes and Consequences

Global Economic Crisis: Causes and Consequences
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Introduction:
The current economic crisis had been persistent for many years. However, the frequency of such economic and financial crises has doubled its rate and could be compared to the era of Great Depression. This recession is often distinguished by several systemic imbalances. On the other hand, the financial disaster that initiated in the mid of 2007 was a great shock to majority of the people. The initial troubles in the subprime mortgage of U.S., initially seen as difficulties in the U.S. subprime housing market, rapidly soared and dripped over the financial markets and afterwards hit the economy. This crisis has distorted the financial scene along the globe and the resultant costs incurred are yet to be assessed. For example in the U.S., constantly increasing unemployment rates, declining consumer confidence, the continuing declining prices in housing market, increased bankruptcies, an rising inflation and federal debt and rising food and petroleum prices (Shah, 2008). Causes:

The causes of this global depression can be sort out investigating the sudden decline in the U.S financial system. Until the end of 2008, it was widely considered that the U.S. housing market declined due to poor incentives. As the traditional procedure to operate the mortgage market was changed and alteration in the incentive mechanism occurred. As a replacement of banks, brokers with a few banks initiated originating mortgages and then selling them and let them be securitized. These banks and brokers were paid on the basis of approved number of mortgages. Since there incentives were attached to the number, they started selling as scores of mortgages to earn more without considering the worthiness of the clients. The next...
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