Financial crises are not a new phenomenon. The world economy has from time to time been hit by crises, and the current crisis is most probably not the last one. The world economy is teetering on the point of another major depression. Output growth has already slowed considerably during 2011 and weak growth is expected during 2012 and 2013.
The financial crisis that began in 2007 spread and gathered intensity in 2008, despite the efforts of central banks and regulators to restore calm. By early 2009, the financial system and the global economy appeared to be locked in a descending spiral, and the primary focus of policy became the prevention of a prolonged downturn on the order of the Great Depression.
While the U.S. economy initially appeared surprisingly resilient to the financial crisis that is clearly no longer the case. The crisis that began on Wall Street migrated to Main Street. The National Bureau of Economic Research, the semi-official organization that dates recessions, determined that a recession began in December 2007. By April 2009, the unemployment rate had risen to 8.9%, up from its low of 4.4% before the recession. Forecasters expect this rate to rise to 10% or even higher in 2010, and it seems likely that this will go down in history as the worst recession since the Great Depression of the 1930s.
Financial crisis of 2007–2008:
The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of government policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices—including those based on over-reliance on Black-Scholes-Merton formula—on behalf of both buyers and sellers, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and mid-2009. In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009. In the EU, the UK responded with austerity measures of spending cuts and tax increases without export growth and it has since slid into a double-dip recession. Global Recession of 2008–2012:
The magnitude and scale of the 2007-2008 financial crisis lead to a marked global economic decline that began in December 2007 and took a particularly sharp downward turn in September 2008. The global recession affected the entire world economy, with higher detriment in some countries than others. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the financial crisis of 2007–2008. The economic side effects of the European sovereign debt crisis, accompanied with slowing US and Chinese growth continues to provide obstacles to world economic growth. There are two senses of the word "recession":
➢ a less precise sense, referring broadly to "a period of reduced economic activity", and ➢ the academic sense used most often in economics, which is defined operationally, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth. If one analyses the event using the...