FINANCIAL CRISIS

Financial Crisis 2007: Causes and Theoretical Analysis

Financial Crisis 2007: Causes and Theoretical Analysis

Introduction

Financial crisis can be defined as a condition when money requirement rapidly increases as compared to the money supply. A few decades before, a financial crisis was equal to a banking crisis, but today it can also take the shape of a currency crisis.

Currently the world is facing a global recession that is causing businesses to close down, unemployment to rise constantly, and government revenues to shrink. Recent happenings suggest that big developed economies may have touched the bottom and have started to recover but still unemployment level is hiking. Various banks and household consumers are having serious difficulty in maintaining their bank balances, and since people are unemployed they are forced to leave the houses they have acquired through sub-prime loans.

The Causes of Financial Crisis 2007

During the past three decades consumer expenditure has always been the significant driver of UK economic growth and development, but this boom finally came to an end in the beginning of 2008 when first the hike in oil prices and then the inception of the credit crunch activated a sharp consumer cutback. There are many reasons for the Financial Crisis of 2007, some of which are highlighted below (Mark 2009, pp.42).

Market Instability

One of the major factors for the financial crisis was market instability. It was caused by many factors, but majorly it was caused by creation of new line of credit; it dried out the circulation of money and slowed the economic growth and trading of assets. This affected individuals, business organizations and financial institutes. Several financial institutes were left with mortgaged backed properties which were constantly losing its value. This caused them shortage of excess cash, and they were unable to make new loans (Mark 2009, pp.42).

Domino Effect on Other European Countries

The significant happening of the recent financial crisis, however, was not only the bursting of the housing bubble but the haphazard situation in short-term debt markets. This situation put the survival of many banks in jeopardy and it forced the government to interfere. In principle, general unsteadiness in the financial sector, including exposure to nonpayment, defines systemic risk. Sadly, financial systems do not have an operational technique to describe measure or regulate systemic risk. The chief feature of a systemic risk crisis is the transmittable run on financial institutions that depend on short-term financing, example deposits. Without guidelines, banks are often subject to runs; this is what took place in the early 1930s and during the 19th century (Mills 2009, pp.1).

Credit and Behavior of Brokers

These days almost every economy is based on credit. Credit, if used properly, can prove to be a great source to initialize or grow a business which can further provide jobs to the unemployed. Credit can also serve people in buying expensive items like vehicles and properties. But, in the last ten years or so credit was given senselessly. There was no proper check and balance and credit was given to almost everyone hence it ...