The global financial crisis that was experienced in 2007/2008 affected many nations of the world. Some countries such as America and most European countries were hard hit since they were directly affected by the crisis. Other countries especially those in Asia and Africa were not adversely affected as they were not directly hit by the crisis. This crisis started in the United States after the housing bubble busted. Although the bursting of the housing bubble was the main cause of the crisis, there were a series of events that preceded it.
One event that indirectly contributed to this crisis was the Russian debt crisis as well as the Asian financial crisis that took place in 1997/1998. These two events made many investors to divert their financial investments to other countries that seemingly looked stable. One of such country was the United States. The influx in the foreign funds increased the liquidity in most financial institutions. This made the financial institutions to institute friendly terms of credit so as to encourage borrowers to take loans. Due to the easy access to loans, many consumers became loaded with debt and consumption at this time was largely based on credit money.
With increased access to loans, the cost of housing began to rise. This attracted many investors into the real estate business. Many potential home owners also borrowed to build their own houses. Most financial institutions entered into financial agreements such as Mortgage Backed Securities to help people own homes (Mayes, 2009). After some time, the prices of houses began to fall. The rate at which their prices plummeted was so high that within a very short period, their value was far below the value of the mortgages. Many financial institutions that had borrowed to invest in the real estate business recorded great losses.
With the property prices now worth less than the amount of the loan, many borrowers defaulted on their mortgage repayments. This initiated a foreclosure by the financial institutions. However, this move was of little help to the financial institution as the properties were now worth much less than the bank had loaned to the investors and potential home owners. This foreclosure negatively affected both the financial institutions as well as individual borrowers. For the borrowers, their wealth was drained and their purchasing power eroded (Martin, 2009). For the financial institutions, their strength as banking institutions was greatly affected. Their liquidity had greatly reduced and most of the banks were struggling to carry out their daily monetary activities. The total losses that were recorded during this crisis were estimated to be trillions of dollars globally.
The Federal Reserve as well contributed to this crisis through some of the policies that it...