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What Caused The Global Financial Crisis (Gfc)?

2212 words - 9 pages

What caused the Global Financial Crisis (GFC)?

This was the first global financial crisis since the Great Depression of the 1930s; it spread at an un-parallel rate across the world (Claessens et al, 2013). In the aftermath of the Great Depression it was universally believed by economists that the unregulated financial markets were to blame as they were fundamentally unstable, subject to manipulation by bankers, and capable of triggering deep economic crises and political and social unrest (Crotty, 2009). These are the same issues that occurred following the aftermath of the financial crisis 2007. It can be argued that the current crisis is the latest stage in a series of financial boom and bust cycles, in which there is a shift from light to tight financial market regulations. The global financial crisis (GFC) is seen as the deepest post-World War II recession (Blankenburg & Palma, 2009) with the United States being the epicenter of the crisis due to the housing bubble burst and sub-prime mortgages (McKibbin & Stoeckel, 2010). This essay will be focusing on the housing bubble, sub-prime mortgages, and the interconnectedness of the global banking system, the lack of transparency and regulation within the finance industry as the main causes for the GFC.

One of the causes of the GFC was the housing bubble, where house prices rose sharply in the US, these patterns of housing prices were similar to those in other major financial crises of the twentieth century (Claessens et al, 2013). By the early 2000s housing was the new investment it was a global boom. Low interest rates enouraged households to think of home-ownership as the fastest way to acquire wealth instead of waiting for savings to accumulate. The US housing market prices rose 134% between 1996 and 2006 and whilst in the UK it increased 150% during the same period. This was occuring all over the world, even the emerging BRIC (Brazil, Russia, India and China) economies saw housing booms (Allen, 2013, pp. 66 - 80). Typically within an economy as house prices rise, demand for them would decrease. But within a housing bubble, rising prices lead to an increase in demand, as people assume that the house prices will continue to grow. This caused both borrowers and lenders of mortgages to become very optimistic (Buckley, 2011, p. 35). However all bubbles must burst eventually, as housing prices peaked in early 2006 and started to decline by 2007, many borrowers found that they could no longer afford their mortgages. This led to foreclosures and large numbers of houses entering the market, which in turn led to a decline in house prices. Mortgage holders who had borrowed 100% or close to 100% of the cost their house found that they now had negative equity (Hull, 2008, p. 20). Within the US foreclosure fillings exceeded 3 million in 2008, they were up by 81% from 2007 and 225% from 2006 (USA Today, 2009). Furthermore the bursting of the housing bubble, the loss in asset prices and household wealth...

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