Global Financial Crisis 2008

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1. Introduction

Shah (2010) stated that the global financial crisis which has been brewing for a while has really started to show its effects in the middle of 2007 and into 2008. It started with the default of the subprime housing loans in the United States when its housing bubble burst. It caused a great impact across the globe that first struck down major financial institutions, first in United States and then in Europe, that were directly exposed to the mortgage default risk.

After the turbulent years of the 1990s and early 2000s characterized by recurrent financial crises in emerging economies, financial instability and sluggish and erratic growth in Japan and the dot.com boom-bust cycle in the United States, the world economy enjoyed a period of exceptional growth and stability until the outbreak of the global crisis in 2008.

Low U.S. interest rates and easily available credit were the initial fuel to the growth and excesses of what was then perceived as the strong U.S. housing market in 2002 – 2006. Early signs of the U.S. subprime and financial crisis had begun to surface in 2007. Events in the U.S. was further complicated by announcement that Germany’s Bundesbank intervened by identifying German banks to acquire / support IKB.

Furthermore, the nervousness and instability of the U.S. market prompted the FRB’s Federal Open Market Committee (FOMC) to lower the Fed Funds and Discount rates several times between Sep to Dec 2007

What started as a drop in confidence in the subprime market and followed by the failures of institutions in the U.S. and Germany related to home mortgages/real estate, resulted in withdrawals of deposits in banks and a liquidity crisis that subsequently forced the world’s major Central Banks to provide liquidity as well as guarantees to protect depositors’ money. The situation did not stabilise amidst the uncertainties and nervousness in the international financial markets. More was to unfold in 2008 through 2010 whereby the crisis in the U.S. evolved like a tsunami across the Atlantic Ocean and eventually resulted in global financial crises leading to the acronym “ PIIGS ”– Portugal, Iceland, Ireland, Greece and Spain.

Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

On the one hand many people are concerned that those for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.

The global financial bubble and widening trade imbalances in the run-up to the 2008-2009 crisis are occasionally explained in terms of a global savings glut rather than monetary and regulatory slippages in the United States, including by former and present governors of the Fed (Bernanke, 2009; Greenspan, 2009).

(Sources: BBC, Bloomberg, UPI, globalissues.org, Feb 2009)

2. Causes of Global Financial Crisis 2008

2.1Subprime mortgage loans/lending (subprime mortgage crisis) – provide loans to borrowers who have low income, first time borrower, bad credit history accompanied by easy credit eg. 1% interest rates, rising housing prices that led to housing bubble. Part of what went wrong in the mortgage origination process is that originators receive fees without bearing any credit risk. Originators could be required to have skin in the game to provide them with incentive to be more selective in the loans they originate. It is clear that origination practices did not always provide adequate information to potential borrowers that would enable them to make informed...
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