GLOBAL FINANCIAL CRISIS

Global Financial Crisis

Global Financial Crisis

Introduction

The global financial crisis of 2007 was comparatively recent in origin as compared to other financial crises, and is possibly persistent until now. It was triggered by increasing defaults on subprime mortgages and the disruption of the markets for mortgage-backed securities. The financial crisis took root in the United States of America, and spread to the United Kingdom and other countries the world over. There were numerous things that lead to the financial crisis like the process of globalization that has been occurring since the part thirty years. The crisis began in the sub- prime markets in the United States and spread to the United Kingdom, remainder of Europe and the world. The world's markets were and still are highly integrated. The next trigger was the increase in leverage of the household sector and the corporate sector by way of the sub- prime crisis. Furthermore, this lead to having effects on the entire financial system. Additionally, majority of the risks were underestimated mostly in the corporate sector (Calomiris 2009, pp. 36).

The worldwide economic and financial disaster affected the United States' residential housing marketplace which is in a serious condition. In addition to this, the boom and rising home prices encouraged financial markets to create bundles of real estate assets or mortgage-backed securities (MBSs) that allowed buyers to participate in the ongoing housing boom. Supporters of these new financial instruments thought that they diversified risks associated with investing in real estate markets. However, the opposite happened when the bubble began to collapse in 2006. Home prices began falling and home foreclosures rose markedly. MBSs and other widely marketed financial instruments became unmarketable, crippling U.S. credit markets. The economy began slowing with a recession starting in 2007 that also triggered a major retreat in stock prices. Many U.S. households saw significant reductions in personal wealth as the value of both real estate and equity holdings were significantly lowered. The 2007 recession posed a new set of challenges for the conduct of monetary and fiscal policies. Both the U.S. Treasury and the Fed were called on to deal with a banking crisis that was much larger than the S&L crisis but not as severe as during the depression.

Credit Crunch

The financial crisis was the result of the collapse of a bubble in the U.S. housing market. Therefore, in order to understand the financial crisis, it is important to explore the way homeownership is financed in the U.S. The U.S. government has long promoted homeownership, making mortgages available through Federal Housing Administration and Veterans Administration loans, as well as by creating Fannie Mae, Freddie Mac, and related entities. FHA and VA mortgages require lower down payments and offer lower interest rates than conventional mortgages due to a government guarantee on the former. This enables lower income individuals to be able to afford home ownership.

The crisis that began in 2008 has been noted by many international experts as the "crisis of the developed countries', because its consequences ...