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The Recent Global Financial Crisis - Essay Example

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The Recent Global Financial Crisis

The current study focuses on a discussion and analysis of the recent global financial crisis and the consequent credit crunch in an international financial perspective, including the events leading up to the crisis, the economic and financial consequences, as well as the government responses and lessons to be learnt. Events Leading to the Incidence of the Global Financial Crisis: The global crisis was initiated in the mortgage lending market in the US, the problem arising with the Federal Home Loan Mortgage Corporation deciding not to pay for mortgages that involved high risks. Secondly, the bankruptcy filed by New Century Financial Corporation that remained a primary lender of mortgages for customers who were riskier in nature. With the occurrence of these incidents, the house prices started dripping down and foreclosures started increasing. With the increases in the risk factors and the fall in asset prices, the financial institutions feared the payments of interests and apprehension of severe losses prevailed. Although Federal Reserve had taken some initiatives in this context to assist the financial firms, however, the fall in prices of the assets could not be held back. Gradually the crisis affected the banking industry in the nation reflected by the bankrupt conditions of Lehman Brothers as well as purchase of Merrill Lynch by the Bank of America in the midst of government not prepared to bail out all banks. The financial markets gradually became highly unstable with severe fall in stock markets (Marshall, 2009, pp.7-8). Some of the primary events leading to the global crisis can be outlined as follows: August 9, 2007- The intimation of liquidity crisis followed by addition of capital by Fed and European Central Bank. March 2008- Bear Stearns was rescued by the Fed. September 8, 2008- Fannie and Freddie were nationalized by the treasury. September 15, 2008- Bankruptcy filed by Lehman Brothers (assets of $600 billion being the largest in the history of the US). September 16, 2008- Fed made bridge loans to the largest insurance company in the world, A.I.G. October 3, 2008- Bailout policy passed out by the government; Treasury was given the authority to spend $700 billion. With all these above mentioned events gradually occurring, the stock prices fell rapidly accompanied by fall in real housing prices by about 30 percent from 2006 to 2008 (Historical Context, n.d.). Economic and Financial Consequences of the Global Recession: The severity of the global recession has had its impacts on the prices of assets, the productions as well as the employment. These effects were not only restricted to the US but spread across the world with differences in the levels of their impacts. The most significant of these has been the impact on the debts and creditworthiness of companies and that the crisis led companies to encounter difficulty in performing exports and earn gains following their settled plans (Reinhart, 2009). Three particular consequences could be realized from the global recession. These included: (i) the rising debt, the household debt in particular; (ii) the possibility of a comeback to an insecurity with respect to international ...Show more

Summary

The Recent Global Financial Crisis Introduction: The recent global crisis that the world suffered from had started developing for a while before it had its impacts in the middle of the year 2007 and then in 2008 (Obstfeld & Rogoff, 2009, p.1). The crisis affected the entire world with fall in the stock markets, financial institutions being sold out or warped leading to the emergency need for rescue packages from the governments in order to bail out the severely impacted financial firms…
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