Global Financial Crisis: Causes and Effect
Introduction
The financial crisis that began in 2007 spread and gathered intensity in 2008, despite the efforts of central banks and regulators to restore calm. By early 2009, the financial system and the global economy appeared to be locked in a descending spiral, and the primary focus of policy became the prevention of a prolonged downturn on the order of the Great Depression.
The volume and variety of negative financial news, and the seeming impotence of policy responses, has raised new questions about the origins of financial crises and the market mechanisms by which they are contained or propagated. Just as the economic impact of financial market failures in the 1930s remains an active academic subject, it is likely that the causes of the current crisis will be debated for decades to come.
Financial Crisis The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.
Major causes of Financial Crisis
Imprudent Mortgage Lending: Against a backdrop of abundant credit, low interest rates, and rising house prices, lending standards were relaxed to the point that many people were able to buy houses they couldn’t afford. When prices began to fall and loans started going bad, there was a severe shock to the financial system.
Housing Bubble: With its easy money policies, the Federal Reserve allowed housing prices to rise to unsustainable levels. The crisis was triggered by the bubble bursting, as it was bound to do.
Global Imbalances: Global financial flows have been characterized in recent years by an
The financial crisis that began in 2007 spread and gathered intensity in 2008, despite the efforts of central banks and regulators to restore calm. By early 2009, the financial system and the global economy appeared to be locked in a descending spiral, and the primary focus of policy became the prevention of a prolonged downturn on the order of the Great Depression.
The volume and variety of negative financial news, and the seeming impotence of policy responses, has raised new questions about the origins of financial crises and the market mechanisms by which they are contained or propagated. Just as the economic impact of financial market failures in the 1930s remains an active academic subject, it is likely that the causes of the current crisis will be debated for decades to come.
Financial Crisis The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.
Major causes of Financial Crisis
Imprudent Mortgage Lending: Against a backdrop of abundant credit, low interest rates, and rising house prices, lending standards were relaxed to the point that many people were able to buy houses they couldn’t afford. When prices began to fall and loans started going bad, there was a severe shock to the financial system.
Housing Bubble: With its easy money policies, the Federal Reserve allowed housing prices to rise to unsustainable levels. The crisis was triggered by the bubble bursting, as it was bound to do.
Global Imbalances: Global financial flows have been characterized in recent years by an