Global Crisis Economics

Topics: Great Depression, Economics, Bank Pages: 1 (282 words) Published: February 21, 2013
In 2008, the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The contagion, which began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas. By the end of 2008 major banks like Lehman Brothers, mortgage lenders and insurance companies declared massive losses and cases of bankruptcy. The major reason was the bursting of the real estate bubble in US and other western countries because the bubble had become too big, as too many people with too little money owned too many homes. People had started mortgaging houses for speculation rather than shelter due to 0low interest rates. The mortgages, unlike previously were easily available because way of lending changed. The brokers and banks were now paid based on the number of mortgages they approved, so their incentive was to give out more and more loans regardless of their credentials. And it was of no surprise when most of them turned out to defaulters, leaving the financial market in liquidity crisis. This crisis affected other businesses which normally relied on credit suffered heavily as they were unable to get loans from the banks, and as a result the share prices plunged throughout the world and the US stock market became highly volatile and crashed. Less-developed countries likewise lost markets abroad, and their foreign investment, on which they had depended for growth capital, withered. With none of the biggest economies prospering, there was no obvious engine to pull the world out of its recession, and both government and private economists predicted a rough recovery.
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