“ANALYZE THE CAUSES AND CONSEQUENCES OF THE GREAT RECESSION OF 2007-2009.”
Okunlaya Babatunde Badrudeen
Course Title/Code: Global Economy
Tutor: Rolve Melfe
The financial crisis of 2007–2009 began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank (see desktop Financial recession 2007 -..) Although America's housing collapse (which peaked in approximately 2005 – 2006) is often cited as having caused the crisis, the financial system was vulnerable because of intricate and highly-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such high levels of leverage, and generally a "hypertrophy of the financial sector" (financialization) ( see desktop doc in above citation).
What started as an American ‘prime-mortgage’ lending crisis spread to Europe and the emerging markets of Asia, South East Asia and Latin America, affecting a wide range of financial and economic activities and institutions, which includes, the tightening of credit with financial institutions making both corporate and consumer credit harder to get, devaluation of the assets underpinning insurance contracts and pension funds leading to concerns about the ability of the instruments to meet future obligation, devaluation of some currencies /increased currency volatility and liquidity problems in equity funds and hedge funds.(Francis Ikome 2008 - The Social and Economic Consequences of the Global financial crisis on the developing countries and emerging
economies: a focus on Africa. – Berlin recession 11 pdf). It was considered to be the worst financial crisis since the Great Depression of the 1930. It contributed to the failure of key businesses (e.g. Lehman Brothers etc), decline in consumer wealth, substantial commitment incurred by governments and a general decline in the global economic activities. This coursework will attempt to trace the history of financial crisis from the past to the present, the causes and the effects on ...., and also an attempt will be in the likely solution to counter the effects by different economy.
THE CRISIS – HOW IT EVOLVES
A financial crisis occurs when there is a disorderly contraction in money supply and wealth in an economy. It is also known as a credit crunch. It occurs when participants in an economy lose confidence in having loans repaid by debtors. This causes lenders to limit further loans as well as recall existing loans. The previous major financial crisis occurred in 1928 to 1933,..... As opined by Davis (2008), it could be argued that a key root cause of the crisis has been the decision in the 1980’s and 1990’s to move away from structural regulation to an almost sole concern with the efficiency of the financial system.
MAIN CAUSES OF THE CRISIS
1. The US Housing Bubble
As stated in the introduction of this coursework, the financial crisis (2007 – 2009) can be linked directly with the housing bubble in the United States. Typically, the price of America houses between 1997 and 2006 increased by about 124% (see appendix 1) which resulted in few homeowners refinancing their homes at lower interest rate or taking out a second mortgage secured by price appreciation (Financial Crisis of 2007 – 2010, Wikipedia). The average US housing prices reached its peak in mid 2006, and by 2008 had declined by over 20% (see appendix 1) where borrowers with adjustable rate mortgage could not refinance, avoiding the higher payments (because of the rising interest rate) and began to default. Lenders began foreclosure proceedings on about 1.3 million properties (in 2007) which increased to 2.3 million in 2008 (an...