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Financial Crisis Paper - Essay Example

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It is a result of improper policies implemented in the financial system which gives birth to numerous micro and macro economic problems. These reasons have varying severity and have affected the global economies of the world. The recent recession has webbed the entire global economies into its victimization and caused severe distress among both, developed and under-developed countries of the world. Recent economic crisis has paved way for inequality across many nations and has had a dampening impact upon their financial position. This crisis has led to other severe crises and it is matter of global concern. Economists believe that the deregulations of 1980s are the major root causes for the recent financial crisis which is likely to bring an end to free market economics. Reagan administration initiated liberalization, which brought about breakdowns in series due to which the government intervened and ultimately the structure destroyed the whole financial system. The Financial Crisis In 2008, the global market collapsed, The Bush administration figured out that only government intervention could save the companies whose failure could fetch destructive reactions. American Insurance Group (AIG) and Fannie Mae and Freddie Macare are those two giants which suffered from this crisis. The companies had come to this point of crisis because free market had allowed them to make investments due to which the institutions were posed to risks. Millions of people in America lost their jobs and had their savings bushed. A number of factors have been blamed for this crisis but economists believe that free market is the very basic factor amongst all. Nobel laureate Joseph Stiglitz wrote in his book Freefall that market fundamentalists and deregulators are responsible for the mess. The situation showed that free-market economists failed and market fundamentalists were responsible for the economic crunch (Sorman 2010). The economy of United States of America witnessed only a few minor recessions each for a short period of time. Those recessions did not stir the economy enough to cause economists to develop a well descriptive recession model. With no major recessions over a long time, the economists tend to believe that the crisis may not happen. The model derived by free market economists was running a healthy economy from 80s to 2008 making economists believe that the model may not turn the situation upside down (Sorman 2010). The free market economists argue that it is the recession that prompted the financial crisis and not the other way around. Economists believe that recession began in 2007 when consumer spending decreased, overdue borrowing increased and lack of interest of homeowners in their mortgaged houses increased. They claim that the failure of financial derivatives were not the cause of financial turmoil as they were helping in the stabilization of the economy. Economists assume that due to a sudden economic downfall government faced pressure from political and non political forces to take immediate steps. This led to government spending and its intervention in the scenario which seemed quite logical at that time. The situation worsened with new public debts and regulations which stumbled upon the recovery of the economy (Sorman 2010; Bordo et al 2010). The economy could be recoiled in a quicker way if government had allowed enterprises to ...Show more
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Summary

Name Financial Crisis Economic crisis, also referred to as economic crunch, is a phase that a country experiences which is comprised of an economic downturn due to financial instability. A country that encounters economic crisis will most likely face a number of consequences such as a fall in Gross Domestic Product (GDP), scarce liquidity and inflationary trends…
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