Problems related to incentives and information has been primarily associated with the economic crisis of 2007/2008. Certain incentive systems led the delivery of deceptive information rising conflicts of interests. There were excessive risks involved as well as fraudulent behavior that initiated the crisis. Moreover as the crisis suggested, there was lack of understanding the economics of securitization. Also, the risks were not significantly understood or considered, and the probable events could not be predicted (Stiglitz, n.d., p.1). As a result of the crisis starting in 2007 and building up by 2008, the Wall Street could be said to have been remade (Jones, 2009, p.2). The present study focuses on the events and the causes leading to the crisis and how the situation before crisis differed from that what resulted after the crisis. Lack of predicting the nature of the economy and the prospective results of the economic policies leading to decline in the economic profits eventually led to the financial crisis of 2007/2008. The Financial Crisis of 2007/2008:
The international trade and the economic growth in the world had presented significant positive results before the economic crisis of 2007/2008. From the time period from 2000 till 2007 the gross domestic product of the world had reflected an increase of 3.2 percent in a year that surpassed the annual growth of the 1990s that figured around 2.5 percent. Countries like China, India and Russia that were emerging as economic countries in the market also reflected expansions in their growth to as high as 6.5 percent in a year resultant of the different economic reforms. The farmers in the U.S. also benefitted from these growths leading to rising farm income of around 43 percent. The financial crisis affected the world starting in 2007 and deepening in 2008 leading to recession in several countries (Appendix A) (Liefart & Shane, 2009). The crisis had initiated in the US when the housing bubble burst out and there were increasing defaults in mortgages, particularly in the subprime mortgages, that had grown for the borrowers who were not worthy of such loans, thereby leading to instability in the financial institutions and subprime losses (Appendix B) (Helleiner, 2011, p.69). The different causes that were obtained to have led to the crisis include: imprudent mortgage lending relaxing the standards of lending, housing bubble reflecting rising prices of houses, global imbalances, securitization, lack of transparency and responsibility in mortgage finance, rating agencies giving AAA ratings to several downgraded securities, mark to market accounting, deregulatory legislation, shadow banking system with financial activities moving out of government safety, non bank runs, off balance sheet financing, subprime lending mandated by government, failure of risk management systems, financial innovation, complexities, human infirmity, bad models of computer, excess leveraging, relaxed regulation of leverages, credit default swaps, over the counter derivatives, fragmented regulation, no systemic regulation of risks, short term incentives, and tail risk (Jickiling, 2010, pp.5-10). These issues initiated in the US and gradually affected the world and the international trade. With the crisis deepening in 2008, various measures that imposed restrictions on trade activities were initiated by different countries. General hikes in tariffs, particularly in iron and steels, primary products, agricultural foods, were incorporated in countries like Russia, India, Turkey, Vietnam, Ukraine, EU, Brazil and Ecuador. Standards and certifications in trade also changed in several countries like Malaysia, India, Indonesia, Ecuador, Thailand and South Korea with bans and restrictions on several business issues. Licensing system of imports also altered from ‘free’ to ‘restricted’ in many countries as a result of the recession. Also, several goods and products were made to be under the...
References: 7) Jickling, M. (2010). Causes of the Financial Crisis, Congressional Research Service, FAS, Retrieved on September 24, 2012 from: http://www.fas.org/sgp/crs/misc/R40173.pdf
8) Jones, C.I
GDP Growth in US, World and Emerging Countries Before and During the Economic Crisis of 2007/2008 (Liefart & Shane, 2009).
Subprime losses of 15 Largest Subprime Serving Companies in 2008 (Private Wall Street Companies Caused The Financial Crisis — Not Fannie Mae, Freddie Mac Or The Community Reinvestment Act, 2011).
World Trade Percentage Change since Maximum (Globalization not protectionism remains the main trend in the world economy, 2012).
Growth in Volume of World Merchandise Trade and GDP 2005-13 in Annual Percentage Increase (Trade growth to slow in 2012 after strong deceleration in 2011, 2012).
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