Global Financial Crisis

Global Financial Crisis, brewing for a while, really started to show the effects in the middle of 2007 and into 2008. It all began with the one and all American dream, that every American should have home. Regardless of who you are and what you do, if you are an American, you should have something called a home. Real Estate business was in boom, and financial agents thought that there wasn’t a better time to give away loans. The Household sector was given a boost with increased monetory supply by commercial financial companies, and people wew given loans regardless of the credit rating they recevied. It was never expected that the boom in the Real Estate business would come to such an abrpt end, and the prices would reach all time low. The US economy being a capitalist driven economy didn’t bother to indulge itself in the policies pursued by the then prominent financial giants. Gradually these financial giants in this business started feeling the heat as “subprime” clients started defaulting intheir repayment of loans. The properties which were mortgage by the clients weren’t even covering the principal amount of the loan, leave alone the interest commitments. The credit offered to the people in indiscriminate fashion, achieving about long term sustainability of the policy, backfired completely and companies like Lehman Brothers, Merill Lynch, Freddie Mac and Fannie Mac’s “bad assets” reached magnanimous proportions. An acute credit shortage was experienced in the economy, and simultaneous negative effects started occuring. The credit crunch meant that borrowing interest rates shot up in the market, companies slowed down their investment policies, production declined, lay offs increased, consumption decreadsed and the whole economy followed the downward spiral. The unemployment rate in the US reached an all time high of 6.1% and industrial growth saw its largest decline in the past three years and fell to 1.1%.

The causes for this financial crisis are varied and there is no unanimity among factors responsible for financial crisis. According to one view crisis was started due to collapse of the US sub prime mortgage market. At the same time there was reversal of housing boom in other industrialized economies.

There are many technical explanations of how sub prime mortgage crisis came about. Sub prime mortgage crisis took place in US because American Financial System failed in two crucial responsibilities – managing risk and allocating capital. Regrettably, many of the worst elements in US financial system were exported to the rest of the world. Many economists say those crises are created by politics but not by economics.

Another view expressed for Financial Crisis is large current account surpluses in China and a few other countries and at the same time US economy is suffering with deficts. As a result the countries with surpluses needed an investment destination which was US. This lead to huge flow of money into US economy and as a result the interest rates have been reduced. Due to this real estate boom created and when boom bubble was burst this lead to financial crisis.