“The roles of the main EU institutions (Council, Commission and Parliament) in the management of the continuing economic/financial crisis”
Methodology – There is a wealth of information for this report since it is an up-to-date topic which affected the whole world. The research is based on analysis and factual material presented in European Institutions reports, books, analysis and commentary from leading economists, Irish Government web-site, e-journals from DBS Library and Google Scholar. The information taken from the Internet is written by professionals and published on reliable sites. The relevance and credibility of resources were checked and all sources used are presented in bibliography.
The financial crisis of 2007-2008 is considered to be the most severe financial crisis since the 1930s. It resulted in collapse of financial institutions, bailout of banks by the national governments and an overall financial turmoil. It started with the bursting of the United States housing bubble. In this period according to Buckley (2011, p.1) real interest rates were exceptionally low and the public expenditure was growing rapidly and it was considered to be a global phenomenon as other states and not only USA were implementing “low interest rates” strategy. This fuelled housing bubble in USA, UK and elsewhere. According to President George W. Bush “everyone has an ‘American dream’ which means that every citizen should have his own house to realize his “American dream””. In order to realize it banks began to give out more loans at very low interest rates to potential home owners and as a result housing prices began to rise until they reached unsustainable level followed by severe price decreases. As the banks increased interest rates, subprime borrowers couldn’t repay higher interest rates and they started defaulting on their loans. In fact it meant that lenders were filing for bankruptcy. Housing bubble had serious impact on financial markets, as Taylor (2009) noted “A sharp boom and bust in the housing markets would be expected to have had impacts on the financial markets as falling house prices lead to delinquencies and foreclosures. These effects were amplified by several complicating factors including the use of subprime mortgages, especially the adjustable rate variety which led to excessive risk taking.” The financial market could not solve the problem of subprime crisis on its own and this problem appeared beyond US borders. For instance, Northern Rock, a British Bank, had to approach the Bank of England for emergency funding due to liquidity problem (BBC News, 2007). The subprime crisis emerged national governments and central banks to cooperate and find solutions in order to provide liquidity support for financial institutions. Despite efforts made to inject large doses of liquidity US authorities had to rescue US investment bank Bear Sterns. Liquidity crisis, declines in credit availability and damaged investor confidence had a huge impact on stock markets where securities suffered large losses. The collapse of market confidence appeared in September 2008 when US government took over the mortgage companies Fannie Mae and Freddie Mac because of the losses they were experiencing, when Lehman Brothers collapsed into bankruptcy, Merrill Lynch was sold to Bank of America and world’s largest insurance company AIG was rescued and nationalized (Jones, 2009). Then it was decided to make a historical $700 billion bailout to purchase distressed assets, especially mortgage-backed securities, and to supply banks with cash. During the financial crisis financial giants Goldman Sachs and Morgan Stanley were converted to bank holding companies marking the end of an era for investment banking in USA (Jones, 2009). Beyond US borders financial, especially in Europe crisis was strongly felt because of close partnership between USA and European Countries. International trade credits dried up, European and US banks had...
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