Economics: Financial Crises

The financial crises which occurred in 2008 led to a recession and the growth rates fell tremendously. This had major effects not only in America but also in other countries, which resulted in a fall in the Gross Domestic Product (GDP) and increased unemployment rates that had never been reached before in certain countries. The more economic developed countries (MEDC’s) such as America had greater effects compared to the less economic developed countries (LEDC’s). The European crises which started in 2011 has also led to similar effects however there are important differences between these two crises which occurred. The European government therefore needs to use the fiscal and monetary policies to try and resolve this crisis. According to Thomas, Hennessey, and Holtz-Eakin (2011: 1), the United States crisis was first and foremost caused by government intervention in the housing market. Many subsidies were given and the banks of America allowed many people to purchase these houses on credit due to the high prices of houses. The low interest rates at the time however, increased the amount of mortgages that were given by the bank as consumers took advantage of this opportunity. The banks however also took this opportunity to borrow a large amount of money to issue mortgages. When the bank’s target group (‘prime mortgages’) was fulfilled, they had to find new markets and therefore started giving these bonds to ‘subprime mortgages’. This market group had low credit rating and the individuals could not however pay their debts and were eventually written off. Due to the supply of houses being greater than the demand of houses, the prices had to drop in order to sell these houses. The value of houses therefore dropped and house owners therefore lost a lot of money as they had purchased them for more when the prices were very high. The banks had therefore also lost money because they did not gain any returns from rent or interest which meant that they could not pay back