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Discuss and analyse the recent global financial crisis and consequent credit crunch - Essay Example

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Discuss and analyse the recent global financial crisis and consequent credit crunch

Massive trade excesses in some nations, and deficit in trade in other nations and lastly, savings rates that were too high in some areas of the world and too low in others were also other events that led to the global financial crisis (Kirton, Oldani, and Savona 2011, p90). The recent global financial crisis events began on 9 August 2007. On that date, there was a seizure in the banking system, which was instigated by the BNP Paribas’ move, to cease its activities in three hedge funds that focused on US mortgage debt (Elliott 2011, p1). In 2008, credit markets in the Wall Street froze, and this indicated that credit crunch crisis was eminent. This affected everything in the financial markets (Szilagyi 2011, p18). Sustained low interest rates that began in 1999 up to 2004 made the adjustable-rate mortgages (ARMs) look very attractive to the potential buyers. The low interest rates were largely driven by the huge current deficit in the United States and other nations such as China who purchased the US Treasury bonds (Marshall 2009, p10). There is strong evidence that suggests that, in most parts of the United States, it had become very easy and cheap to get a subprime mortgage (Marshall 2009, p11). The upward rise in the house prices was as a result of the property speculations. These mentioned factors led to the huge housing bubble. However, a number of factors led to the collapse of the housing bubble. These factors include; (a) stagnation and decline of the average hourly wages in the United States since 2002 until 2009, (b) the growth in housing supply that tracked price rises, and (c) as the interest rates increased, the ARMs became less attractive, and this led to the elimination from the market of most non-prime prospective buyers (Marshall 2009, p13). The macroeconomic imbalances (that is, deficits in the current accounts and low bond yields) stimulated low interest rates, which ultimately affected the housing market (Marshall 2009, p15). The events that led to the recent global financial crisis can be summarised into three main shocks that captured the crisis. Firstly, bursting of the housing bubble caused the reallocation of capital and the consequential loss of household wealth and a drop in the consumption rates. Secondly, a sharp increase in equity risk premium caused a rise in the cost of capital, fall in private investment, and the collapse of the demand for durable goods. Thirdly and lastly, a reappraisal of risk by the households caused them to increase savings, decrease consumption, and discount their future labour income (McKibbin and Stoeckel 2009, p6). Economic and Financial Consequences The global financial crisis has had a significant effect on the public finances of most nations in the world. Fiscal revenues are decreasing because of lower commodity and asset prices, and operation of the automatic stabilizers (International Monetary Fund 2009, p3). The global financial crisis affected both the developing and developed nations of the world. However, the effects were far felt in developing nations where there was further segmentation. In the advanced economies, the global financial crisis led to the drying up of credit, as susceptible financial institutions became highly risk unfavorable and very cautious in evaluating the creditworthiness of other companies (Kirton, Oldani, and Savona 2011, p91). Even with the massive bailouts to the ...Show more
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Discussion and Analysis of the Recent Global Financial Crisis and the Consequent Credit Crunch Events Leading To the Global Financial Crisis There has been a considerable debate on the events that led to the global financial crisis. However, the genesis of the global financial-turned-down crisis can be linked to the combination of absence of proper regulations and worldwide financial excesses…
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