Causes and effects of global financial crisis 2008
There are several factors that contributed to the financial crisis of 2008. While this is the case, there are experts who pin point specific factors that might have contributed to this such as international trade imbalance as well as changes in the standards of lax lending.
The immediate cause of the crisis can be attributed to the risk of failure or failure of major financial institutions across the globe. Key among these was Bear Stearns an investment bank that was rescued in 2008 March as well as Lehman Brothers failure which occurred in 2008 September. Majority of the institutions that collapsed had made investments in risky securities as such, they lost all or much of the value they had once the European and United States bubbles started to deflate in 2008. By that time, most of the institutions were already dependent on markets of short term funding as such, disruptions were nothing new. There are two major factors that contributed to the creation of bubbles and they included:
- Low rates of interest in Europe and the United states following the 2000 to 2001 recession.
- Major savings growth which was available in the form of savings and available through developing nations thanks to ongoing imbalances in regard to trade.
It is because of these factors that the demand for investments that were high yield skyrocketed. Big investment banks made connections with housing markets to access savings through innovative new securities and this only served to fuel house bubbles in Europe as well as the United States.
There was also market instability which was caused by several factors key among them the dramatic change in creation of new credit lines. These dried up money flow and also slowed economic growth as well as the selling and buying of assets. As a result of this move, business, financial institutions and individuals were hurt badly by the crisis while financial institutions were left with the mandate of bringing in the movement that was needed in order to pay the loans. This led to the drying up of cash reserves and also restricted credit and the ability to issue new loans.
Additionally, cheap credit made it possible for people to make investments and buy property on speculation alone. This meant there was additional (more) money than needed in the system. As a result of this, people ended up buying the same this and this only served to spike up demand leading to inflation. American economy is solely built on credit which though is a great tool must be used wisely for its benefits to be reaped. It was as a result of greed for credit that the global crisis was sparked.
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