Causes of Gfc

Topics: Subprime mortgage crisis, Mortgage, Investment Pages: 1 (303 words) Published: April 22, 2013
The Global Financial Crisis that struck in mid-2007 has had cascading effects around the globe since its occurrence. The crisis resulted in the threat of collapse of large financial institutions, downturns in stock market, foreclosure, prolonged unemployment and many more negative impacts. There have been numerous perspectives regarding its causes; while some attribute it to the failure of the policymakers; others blame it on financial institutions. Whatever the causes were, its influences can still be felt in present global economy. For an economy to be affected at macro level, there are various contributing factors and in case of GFC, there were even more like sub-prime mortgage market, housing boom, low interest rates, easy credit conditions, weak and fraudulent underwriting practices, deregulation, etc. Among them, the primary trigger is believed to be the growth of the housing market in US. As the banks were practicing sub-prime lending, more loans were given out to potential house owners relentlessly. As a result, housing market was seemingly a lucrative business internationally that attracted investors throughout the world to invest in US housing market. In addition, easy availability of credit in US at lower interest rates created abundant liquidity that encouraged people to spend more. However, every debt needs repayment, and as spending was more than earning, it side-effects started to surface. Apart from that, investment bank and hedge funds were cleverly masking the degree of risk in the complex and incomprehensible financial derivatives from investors and regulators that failed miserably. Such malpractices weren’t being scrutinized and questioned by the regulators and policymakers resulting in such crisis. In this way, various factors played a role in causing the global financial crisis. Had there been proper watch and control over these factors, the severity wouldn’t have been so harsh.
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