Preview

The Nature and Causes of the Global Economic Crisis

Powerful Essays
Open Document
Open Document
2114 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Nature and Causes of the Global Economic Crisis
1. The nature and causes of the global economic crisis
What is global economic crisis? – The nature thereof.
Global economic crisis refers to an economic situation in which most of the countries of the world go through a period of economic breakdown called contraction or recession or slump, which manifest itself in the decline in aggregate output, usually for two consecutive quarters. During this contraction period, the structure of the economies change, resulting in economic hardships such as, rising unemployment and inflation and the general decline in the countries’ economic performance.
The global economic crisis is also characterized by falling stock market, housing market, collapse and bailout of large financial institutions and the economic/ financial suffering of the ordinary people who would experience soaring prices, job losses and the accompanying emotional trauma.
What were the causes of the global economic crisis?
The collapse of subprime loans in the US housing market (Case, Fair & Oster 2012:632-638)
The phenomenal growth in the US mortgage lending and the securitization of mortgage loans resulted in a spectacular collapse of the residential housing market. During the US property boom, beginning in the early 2000s, banks began securitizing mortgages and selling them in capital markets in the form of mortgage-backed securities (MBS). The demand for high-yield products based on mortgages was so great and bank fees so large that banks and brokers began to even sell mortgages to those who could not afford them. Consumers and financial institutions amassed very high levels of debt. The whole process was driven by accelerating leverage.
The subprime mortgage crisis erupted in 2007 on the back of a high level of mortgage loan defaults, and lack insufficient provision for defaulted loans. The crisis began in the US, but since mortgage-based financial products had been dispersed around the world, we soon had a global financial crisis. It all started



References: 1. Case KE, Fair RC and Oster SM. Principles of Economics. 10th edition. Pearson Education, Prentice hall, 2012. 2. Mohr P, Fourie L, and associates. Economics for South African students. 3rd edition. Van Schaik. 3. Global Journal of Business Research: Volume 4. No3. 2010 “Did FASB 157 Cause the Financial Crisis?” Peter Harris, New York Institute of Technology, Paul R. Kutasovic, NY Institute of Techno) 4. The Global Economic Crisis of 2008-2009 – A. Rapport and A. Gerts. “Sources and Causes” 5. A. Suetin - “Causes of the Current Financial Crisis” 6. McGraw – Hill – “Effects of the Global Financial Crisis” 7. Wikipedia – Aggregate demand and aggregate supply definitions

You May Also Find These Documents Helpful

  • Powerful Essays

    Housing Market Crisis

    • 2136 Words
    • 6 Pages

    Marshall, J. The financial crisis in the US: key events, causes and responses. [online] HOUSE OF COMMONS LIBRARY. Available at: http://www.voltairenet.org/IMG/pdf/US_Financial_Crisis.pdf…

    • 2136 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    Jaffe, Dwight M (2008) The US Subprime Mortgage Crisis: Issues Raised and Lessons Learnt. Working Paper No. 28, Commission of Growth and Development, The International Bank for Reconstruction and Development/ The World Bank.…

    • 1746 Words
    • 7 Pages
    Powerful Essays
  • Satisfactory Essays

    From the late 1990s until the mid 2000s, the U.S. housing market experienced a tremendous boom, which ultimately ended up a disastrous bubble. A major change in how lenders provided mortgages led to more money available to non-prime borrowers. Many of these mortgages had unfavorable terms for the borrowers including high interest rates and unaffordable monthly payments. Soon, borrowers were unable to pay their mortgages and were forced to foreclose on their homes. A rise in foreclosures caused a ripple effect through financial markets supported by mortgage-backed securities (MBS), culminating in a worldwide financial crisis.…

    • 517 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    New Century Case

    • 2093 Words
    • 9 Pages

    Over the past two decades, nearly half of the homeowners obtained their loans through subprime mortgage lending. Subprime mortgages were becoming increasingly ordinary in daily life of business for homeowners over the past two decades. However, numerous lending institutions provided home loans to borrowers who have high credit risks and are not be able to payback the loans. New Century, which is the second largest subprime lender in the country, prospered over the last decade. However, its sudden collapse following the restatement of company’s financial statements, contributed significantly to the subsequent events that eventually lead to the plunge of global financial systems in 2008. Along with New Century, Bear Stern, Lehman Brothers and Merrill Lynch are major players, which are brought down by the subprime mortgages fiasco. This case briefly provided us the meltdown of the subprime mortgages market and how it eventually leaded to an unprecedented global financial crisis.…

    • 2093 Words
    • 9 Pages
    Powerful Essays
  • Good Essays

    Almost seventy years after the worst economic crisis struck the world in the 1930s, history repeats itself again. The Great Depression that occurred in 1929 and today’s great recession have many similarities. Both had disastrous effects on the global economy. Like today, many years of economic deregulation paved the way for these turmoils and social troubles. Banks were giving away cheap credits without running any background information on their customers. People took advantage of this and started buying houses and other luxuries they couldn’t afford. Default in paying back their mortgage led to many problems such as real-estate crisis, rising inflation, soaring unemployment rates, and stock market crash.…

    • 681 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    The financial crisis of 2007–2009 began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve, Bank of England and the European Central Bank (see desktop Financial recession 2007 -..) Although America 's housing collapse (which peaked in approximately 2005 – 2006) is often cited as having caused the crisis, the financial system was vulnerable because of intricate and highly-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such high levels of leverage, and generally a "hypertrophy of the financial sector" (financialization) ( see desktop doc in above citation).…

    • 1730 Words
    • 7 Pages
    Powerful Essays
  • Powerful Essays

    Source: „The Current Financial Crisis: Causes and Policy Issues“ by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee…

    • 1831 Words
    • 8 Pages
    Powerful Essays
  • Powerful Essays

    JPMorgan Chase

    • 2731 Words
    • 11 Pages

    Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a slowdown in the US housing market. Homeowners, many of whom could only barely afford their mortgage payments when interest rates were low, began to default on their mortgages. Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rose to record levels. The impact of these defaults were felt across the financial system as many of the mortgages had been bundled up and sold on to banks and investors (http://news.bbc.co.uk/).…

    • 2731 Words
    • 11 Pages
    Powerful Essays
  • Powerful Essays

    Easy credit conditions in the United States led by steadily decreasing interest rates and an influx of foreign funds created a housing bubble, which was financed by a large number of subprime mortgages. These were easy to obtain and put home purchasing power into the hands of consumers who received poor credit ratings and ran higher risks of not maintaining the repayment schedule or worse, default. Such ʻsecond-chanceʼ loans are offered to borrowers at higher interest rates and less favorable terms to hedge lenders against the higher credit risks (Barrow 2009). These mortgages were then repackaged and sold as investment products called collaterised debt obligations (CDOs) or mortgage- backed securities (MBS) in a process known as securitization. Government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac traditionally bought the mortgages and repackaged them in a secondary mortgage market to investors, allowing lenders to reinvest into more lending and thus increase the number of lenders in the mortgage market. Intense competition between mortgage lenders for revenue and market share exacerbated relaxed standards in lending due to limited supply…

    • 2062 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    References: Bianco, K. (2008).The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown. Retrieved from http://business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf…

    • 1178 Words
    • 5 Pages
    Powerful Essays
  • Good Essays

    The 2008 Financial Crisis

    • 642 Words
    • 3 Pages

    The most recent financial crisis in 2007-2009 was the worst recession since the 1930’s was quite evident as it affected the entire economy on a global scale; from large countries to small ones. The starting point and reason behind a financial crisis is varied, they appear in different shapes and sizes which could have originated externally or domestically and emerged from the public or private sector. Consequently with time, they take different forms and spread rapidly across boarders. Which is why Reinhart and Rogoff (2009) fittingly said that the, “financial crises are an equal opportunity menace.”…

    • 642 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Cox, Wendell. "Root Causes of the Financial Crisis: A Primer." Newgeography.com. 28 Oct. 2008. Web. 8 Mar. 2012. .…

    • 1335 Words
    • 6 Pages
    Powerful Essays
  • Powerful Essays

    The US subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage holes and foreclosures, and the resulting decline of securities backing mortgages.…

    • 2973 Words
    • 12 Pages
    Powerful Essays
  • Good Essays

    The subprime mortgage crisis is foreclosures of the U.S housing market which began in late 2006 until present day. Prior to 2006, the housing market seemed to be going up for long time. Noticing this trend, borrowers think that everything was fine and refinancing will solve any future problems. In 2006-2007, the housing market moderately cooled down. Many unable to refinance because of higher interest rate of Adjustable Rate Mortgages (ARM), found themselves in a deep bind. Massive defaults and foreclosures soon followed.…

    • 528 Words
    • 3 Pages
    Good Essays
  • Best Essays

    References: -Blanchard, O.J., 2008, The crisis: Basic Mechanism and Appropriate Policies. Cambridge: Massachusetts Institution of Technology, Working Paper.…

    • 2291 Words
    • 10 Pages
    Best Essays