The Financial Crisis
1. Write below in 10-15 sentences in your own words, what were the causes of the recent Global Financial Crises of 2008-2009? Explain how it all started and what happened.
The financial crisis of 2008-2009 has been largely and mainly attributed to the paralysis and failure of credit industry including mortgages. People were described to be using money that they don’t have, and the failure to repay such debts led to the collapse of the market. Fund sources became dried up because the rate of spending was not compensated by the rate of returns. The availability of “cheap money” due to credit lines allowed the creation of high demand for the same thing which then caused inflation. This also led to the fall and bankruptcy of different banks which needed bailouts from the government, or merging with other institutions in order to survive. The fall of the housing business also contributed to the financial crisis. More people defaulted on their mortgages which resulted to availability of more houses which increased the supply and then lowering the cost. However, the banks who invested in housing also borrowed the money – but due to low demand in properties and its low cost, they don’t have the ability then to repay what has been lost. This phenomenon rippled into other financial domains resulting to the financial crisis observed in 2008.
2. Explain using 5-10 sentences what were the repercussions to the whole world economy of this financial crisis which started in US.
The US economy, being one of the largest economies in the world, has a global influence in the regional economies. The downfall of the US market, the confidence of both the consumers and the business collapsed. According to the WTO (2008), global recessionary impact has been felt globally in the same year. This has implications in the purchasing activity and spending which will affect the flow of money, credits and investments. The rate of trade growth has slowed down to 2.1% in 2008 from 6.4% in 2007.
The financial crisis of 2008-2009 has been largely and mainly attributed to the paralysis and failure of credit industry including mortgages. People were described to be using money that they don’t have, and the failure to repay such debts led to the collapse of the market. Fund sources became dried up because the rate of spending was not compensated by the rate of returns. The availability of “cheap money” due to credit lines allowed the creation of high demand for the same thing which then caused inflation. This also led to the fall and bankruptcy of different banks which needed bailouts from the government, or merging with other institutions in order to survive. The fall of the housing business also contributed to the financial crisis. More people defaulted on their mortgages which resulted to availability of more houses which increased the supply and then lowering the cost. However, the banks who invested in housing also borrowed the money – but due to low demand in properties and its low cost, they don’t have the ability then to repay what has been lost. This phenomenon rippled into other financial domains resulting to the financial crisis observed in 2008.
2. Explain using 5-10 sentences what were the repercussions to the whole world economy of this financial crisis which started in US.
The US economy, being one of the largest economies in the world, has a global influence in the regional economies. The downfall of the US market, the confidence of both the consumers and the business collapsed. According to the WTO (2008), global recessionary impact has been felt globally in the same year. This has implications in the purchasing activity and spending which will affect the flow of money, credits and investments. The rate of trade growth has slowed down to 2.1% in 2008 from 6.4% in 2007.
References: Ammari SS. 2009. UAE Minister: Global financial crisis had minimal impact on UAE economy in 2008. Retrieved on May 16, 2012 from < http://www.ameinfo.com/190074.html>. Drine I. 2011. Impact of the global economic crisis on the Arab region. Retrieved on May 16, 2012 from < http://www.wider.unu.edu/publications/newsletter/articles/en_GB/05-06-2009/>. Ellaboudy S. 2010. The global financial crisis: economic impact on GCC countries and policy implications. International Research Journal of Finance and Economics, 41:176-194. Hulbert M. 2010. Its dippy to fret about a double-dip recession. Retrieved on may 16, 2012 from http://online.barrons.com/article/SB50001424052970203983104575367471896032724.html?mod=googlenews_barrons>. ILO. 2011. Global Employment Trends 2011, The Challenges of a Job Recovery, ILO, Geneva. United States Department of the Treasury, Office of Financial Stability. Troubled Asset Relief Program:Two Year Retrospective.. Retrieved on May 2012 from < http://www.treasury.gov/initiatives/financial-stability/briefing-room/reports/agency_reports/Documents/TARP%20Two%20Year%20Retrospective_10%2005%2010_transmittal%20letter.pdf