2008-09 Global Financial Crisis

Topics: Subprime mortgage crisis, Bank, Federal Reserve System Pages: 8 (3085 words) Published: December 10, 2012
The most influential trend in the world economy is a major downturn in economic activity, including economic recessions in many of the most powerful countries in the world. At the end of 2008, the U.S, Japan, Germany, France, and the European Union as a whole, observed that the economy was moving at a slow space and at that point the declared recession. The financial crisis also known as the subprime crisis became noticeable when the U.S housing bubble sparked a fierce global economy crisis affecting the financial and industrial sectors of the world economy. The financial crisis that happened in 2008 as to Wikipedia is considered by most economists to be the worst financial crisis since the Great Depression in took place in the 1930’s. Large financial institutions collapsed, banks had to be bailed out by the government and stock prices began to fall around the globe. The housing market suffered from the crisis which resulted in foreclosures, evictions and also unemployment. The crisis played an important role in the failure of key businesses, declined consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. Before the financial crisis in 2008, banks gave out mortgages that individuals couldn’t afford. These individuals were not financially qualified; they were not earning enough salary. Firms like Fannie Mae and Freddie Mac got extra greedy and sold a whole lot of bad mortgages, with high interest rates to individuals that were also not financially stable in order for them to earn high fees in the mortgage transactions. This led to the main factor starting the U.S. crisis which is known as the ‘sub-prime’ mortgages, loans couldn’t be paid back, not enough money supply in the economy which led to a fall in the stock market and this was the beginning of the financial meltdown in the world economy (Wikipedia. 2012. para 1-5). According to Harrington (2009), there were various other factors that contributed to the financial crisis. He points out that the ‘Federal government policies encouraged rapid expansion of lending to low-income home buyers with low initial interest rates, low down payments, and lax lending criteria, that government-sponsored and private residential mortgage-backed securities, rapid growth in credit default swaps (CDS), and related instruments spread exposure to house price declines and mortgage defaults widely across domestic and global financial institutions in a complex and opaque set of transactions. He also goes on by saying that bank holding companies aggressively expanded mortgage lending and investment, often through off-balance sheet entities that evaded bank capital requirements. Leading investment banks invested aggressively in mortgage-related instruments. He finally gives his last point that the Lehman Brothers, AIG, and other organizations became major writers of credit default. When coupled with high leverage, CDS protection sellers became highly vulnerable to mortgage defaults (p.1)”. The 2008 financial crisis in the U.S. led to a number of banking crises throughout the world and was triggered by mismanagement of financial innovations involving subprime residential mortgages and the bursting of a housing-price bubble (Mishkin & Serletis, 2011, p. ), Mishkin & Serletis (2011), stated that even though the problem first started in the U.S. the awareness came from Canada and Europe. This showed the development of the financial markets globally. They go on by saying that the freezing of the asset backed commercial paper caused a severe fall in liquidity in Canadian short-term credit markets but that in order for the confidence and liquidity in the asset- backed commercial paper market to be restored an agreement was reached which is known as the Montreal Accord. The Montreal Accord is to help prevent important write-offs for the bank and to restructure the frozen...
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