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Cause of the financial crisis of 2008
Causes of the 2008 financial crisis
Causes of the 2008 financial crisis
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“The financial crisis has essentially caused an unprecedented fall in aggregate demand. Aggregate demand has fallen because: Bank lending decreased due to the credit crisis and shortage of bank funds. The shortage of bank lending has reduced investment and consumers spending (both components of AD), Falling house prices. The credit crisis has reduced the availability of mortgages and therefore reduced demand for buying houses. Also, house prices were overvalued. So, with less mortgages available prices have been falling significantly. The fall in house prices has caused a negative wealth effect. This has led to lower consumer confidence, lower equity withdrawal and a decline in consumer spending. Fall in global growth. The decline in economic
growth has caused a decline in exports and world trade, further reducing aggregate demand. Decline in confidence. The well-publicised problems of the banking sector and stock market falls have reduced consumer confidence and led to a change in attitudes. Rather than spending on credit people are trying to improve their savings and reduce their debt. In early 2008, there was an increase in oil prices which led to cost push inflation. This caused AS to shift to the left and encouraged Central Banks to keep interest rates relatively high. This possibly aggravated the recession.” (Pettinger, 2009)
Just as the great depression, a booming economy had been experienced before the global financial crisis. The economy was growing at a faster rtae bwteen 2001 and 2007 than in any other period in the last 30 years (wade 2008 p23). An vast amount of subprime mortgages were the backbone to the financial collapse, among several other underlying issues. As with the great depression, there would be a number of factors that caused such a devastating economic
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
This paper aims to discuss the Short-Term and Long-Term Impacts of the Great Recession and
Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas". The 2007 financial crisis was composed of the fall of many major financial institutions, an unknown increase in mortgage loan defaults, and the derived freezing up of credit availability (Brue). It was the result from risky mortgage loans and falling estate values (Brue) . Additionally, the financial crisis of 2007 was the result of underestimation of risk by faulty insurance securities made to protect holders of mortgage-back securities from risk of default and holders of mortgage-backed securities (Brue). Even to present day, America stills suffers from the aftermaths of the financial crisis.
Diamond and Rajan (2009) found that investment misallocation is the proximate cause of the credit crisis. In response to the crisis, corporations, governments, and households reduced on investment and decreased consumption. Federal Reserve provides an adaptable monetary policy to guarantee that the world did not suffer in deep recession. The low interest rates increase a large of demand of housing. House pricing become more value for sale and rent in many countries. Credit crisis is initially occurred in U.S because the financial invocation of U.S. Hence, there is more marginal-credit-quality buyer into the market.
5) Why was Canada able to avoid most of the repercussions of the 2008 Financial Crisis? Your answer should delve into the historical development of both systems.
It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market.
Before we begin to implement any changes that will reverse and/or fix the foreclosure crisis, we need to understand the causes of the crisis. There are direct causes and correlative causes. The most direct causes have been discussed ad nauseum in the media. Some of these direct causes include; high (property) taxes, loss of jobs, resetting adjustable Rate mortgages, loss of credit rating (due to other causes that result in the inability of the borrower to pay bills on time or at all), medical bills (also a leading cause of bankruptcy) and an overall spend-thrift zeitgeist. These direct causes are easy to spot, but I believe that they are a distracting muse for our ire. The real causes for the foreclosure and overall financial crisis have more to do with laissez faire market system in general.
The financial crisis occurred in 2008, where the world economy experienced the most dangerous crisis ever since the Great Depression of the 1930s. It started in 2007 when the home prices in the U.S. Dropped significantly, spreading very quickly, initially to the financial sector of the U.S. and subsequently to the financial markets in other countries.
This essay will examine the causes of the 2008 Global Financial Crisis (GFC) from a Marxist perspective. This paper will specifically examine and critique how Marx’s Theory of Crisis can be applied to understand and interpret the underlying structural causes of the 2008 Global Financial Crisis.
In economics, a recession occurs when there is a slowdown in the spending of goods and services in the market. A recession causes a drop in employment, GDP growth, investment, as well as societal well-being. All recessions are caused by a specific cause, but the Great Recession of 2007-2009 was caused by a crash in the housing market. This crash was triggered by a steep decline in housing prices. All of a sudden, people bought houses because there was an excessive amount of money in the economy and they thought the price of houses would only increase. (Amadeo, 2012). There was a financial frenzy as the growing desire for homes expanded. People held a lot of faith in the economy and began spending irrationally on houses that they couldn’t afford. This led to overvalued estate and unsustainable mortgage debt. (McConnell, Brue, Flynn, 2012).
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
Many times when you think of a financial crisis, you think of the Great Depression that occurred in the late 1920’s, or at least I do. Due to the fact that I was only 8 or 9 years old, I do not remember the financial crisis of 2008 having that much of an impact. It did not directly affect my family like the Great Depression did with so many families almost a hundred years ago. When I learned about this first financial crisis in the beginning of the 20th century, I would see pictures of people at soup kitchens and getting food from other sources. This was such a drastic event in my mind. Yet, when the financial crisis occurred in 2008, nothing changed in my life, and I did not see people begging for food in the streets so, I was naive to the
The financial crisis and the great recession are unprecedented events that occurred in the 4th quarter of 2007 that demonstrate the impact that the government has on the economy. The housing market experienced a steady, but promising growth rate prior to the crash of the stock market, which derived from the Dotcom bubble in 2000. Most Investors and consumers’ shifted their spending to the housing market due to the uncertainty of the tech companies in the stock market. This increased the demand for mortgages from banks and therefore increased money supply in the economy. Banks and other depository institutions had financial innovations such as subprime, zero down and adjustable loans.
Several financial statements have been prepared to describe the causes of this current financial failure. There are a variety of factors that has resulted in the explosion of this financial crisis. Downfall of the US housing market; highly benefited financial dealings and a low interest-rate promoting borrowings, have all contributed to the recession monetary market. Let us now consider these various reasons in a little detail.