Macro and Micro Causes of Financial Crisis
Corporate and Wholesale Finance - 12BSP053
“Since 2007 to mid 2009, global financial markets and systems have been in the grip of the worst financial crisis since the depression era of the late 1920s. Major Banks in the U.S., the U.K. and Europe have collapsed and been bailed out by state aid”. (Valdez and Molyneux, 2010) Identify the main macroeconomic and microeconomic causes that resulted in the above-mentioned crisis and make an assessment of the success or otherwise of the actions taken by the U.K government to resolve the problem.
By Alistair Walters – A913910
1
Five years on from the beginning of the worst financial crisis he world has seen we are still in a perils state of low or negative growth and low interest rates. It is clear that there were a number of factors both macroeconomic and microeconomic that created the situation and that the responses by the British government have been mixed at best. Although able to avert a full-scale meltdown of the financial system the British government has been criticised for its ‘backseat’ approach by many. This paper will explore the Macroeconomic and microeconomic causes of the crisis and how the British government has responded, assessing the success of their approach and considering whether the criticism of their policy is justified. Macroeconomic Factors One of the major causes of the global financial crisis was the global financial imbalance of payments consisting of huge deficits in the western world and massive surpluses in OPEC nations and the Far East. The surpluses were invested in western economies that were seen as stable with good potential returns. It meant that the Wests deficit was being financed by foreign 10 years up to the crash.
Exhibit 1.22: UK current account deficit
120
The Turner Review Chapter One: What went wrong?
investment. Fig 1. Shows the growth in the UK current account deficit in the
33
80
$bn
40 0
2003
2004
2000
2001
1997
1998
1999
“Since 2007 to mid 2009, global financial markets and systems have been in the grip of the worst financial crisis since the depression era of the late 1920s. Major Banks in the U.S., the U.K. and Europe have collapsed and been bailed out by state aid”. (Valdez and Molyneux, 2010) Identify the main macroeconomic and microeconomic causes that resulted in the above-mentioned crisis and make an assessment of the success or otherwise of the actions taken by the U.K government to resolve the problem.
By Alistair Walters – A913910
1
Five years on from the beginning of the worst financial crisis he world has seen we are still in a perils state of low or negative growth and low interest rates. It is clear that there were a number of factors both macroeconomic and microeconomic that created the situation and that the responses by the British government have been mixed at best. Although able to avert a full-scale meltdown of the financial system the British government has been criticised for its ‘backseat’ approach by many. This paper will explore the Macroeconomic and microeconomic causes of the crisis and how the British government has responded, assessing the success of their approach and considering whether the criticism of their policy is justified. Macroeconomic Factors One of the major causes of the global financial crisis was the global financial imbalance of payments consisting of huge deficits in the western world and massive surpluses in OPEC nations and the Far East. The surpluses were invested in western economies that were seen as stable with good potential returns. It meant that the Wests deficit was being financed by foreign 10 years up to the crash.
Exhibit 1.22: UK current account deficit
120
The Turner Review Chapter One: What went wrong?
investment. Fig 1. Shows the growth in the UK current account deficit in the
33
80
$bn
40 0
2003
2004
2000
2001
1997
1998
1999