The Global Financial Crisis
Author:
Genre: Finance

Q1)Research the background of the global financial crisis and discuss the factors that attributed to the crisis? (E.g. Who? Where? When? And How?

About the Book

The Global Financial Crisis

Question A1

Much has been written and said about the financial crisis of 2008, but it is essential to know the background of events and the players, who contributed to the financial meltdown which crippled economies around the world and led to the lesser depression in 2009 around the globe. This recession took hold of all the major economies of the world, with only the emerging markets of India, China and Brazil among the few who still improved their economies, albeit at a slower rate.

The background to the economic crisis started with the 2000 internet stock bubble. During this bubble, the American economy went through a downturn. Thus, this led to the interest rates being reduced for real estate. The Federal Reserve lowered the interest rates from 2000 to 2003, taking it from the rate of 6.5% to 1.0% at its lowest. This was done to give impetus to the economy to grow after the dot com bubble of 2000 and the 2001 terrorist attack. It is alos important to note that the US economy at this time was facing a serious threat of deflation. To take care of the lower rates of growth and to increase the spending, the Federal Reserve decided to decrease the rate to encourage the buyers to borrow more and to generate more demand across the board due to it. This led to the real estate boom in the growing economy buoyed by the low interest rates. The mismatch in the economies between the emerging economies and more developed economies like the US, led to more money being available for investment in the financial markets in the US. The availability of funds from the Asian markets led to influx of cash into the real estate market, which lowered the standards of lending and the quality of the debts. The increasing influx of money, when connected to the mortgage sector led to everybody in the mortgage chain making money from the brokers to the investment banks which designed innovative products to sell to the investors (Collander et al, 2009; Hodgson, 2009; Arnold, 2009).

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