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cause of 2008 financial crisis
causes of the 2008 financial crisis
analsis of the fall of the lehman brothers
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Financial crises are considered as an intricate phenomenon and the diverse number of reasons for why they transpire is verification to this intricacy.
Since the middle of 2007, the global economy has had to overcome what is judged as the most lethal global financial crisis ever documented together with a recession, which had drawn comparisons to the Great Depression of 1929 ( Eichengreen and O’Rourke, 2009). As the crisis began inflating into many economies and countries, some of the leading and most esteemed banks and insurance companies were declaring themselves bankrupt or in the need of aid economically. The United States were under tremendous economic pressure in October 2008, when the Lehmann Brothers declared bankruptcy. This led to credit flows being stationary and the confidence of investors to deteriorate thus leading to economies around the world dipping into recession. This paper aims to see if inequality was a cause of the global financial crisis or whether the cause is more conventional then inequality.
The leading elucidations of the current global crisis have focused on deregulation, ideologies from the classical laissez-faire, low interest rates due to the exceptionally slack monetary policy, ‘animal spirits’ as well as moral hazard (Wisman, 2013). Deregulation has been a contributing factor to the rise in banking concentration and this was due to the removal of the Glass-Steagall legislation law. The banking concentration made the financial sector insubstantial due to the creation of a few monopolised financial institutions that controlled over half of the sector. The top four banking organisations held a total of approximately 40 per cent of the total bank assets. Another conventionalist approach into the cau...
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...nal studies that linked inequality and the financial crisis. Using this evidence there was indication that rising inequality has been a contributing factor towards household debt which saw the poor being pushed into debt through a decrease in wages. Contrariwise there were also arguments that rising household indebtedness was due to the actions of the affluent. Maki and Palumbo (2001) used their study to argue that it is not the poor that seem to be accruing the debt, but in fact is those at the heights of the income distribution chain.
Rajan (2010, 43) argued that growing income inequality occurred in the United States due to unequal access to superior schooling and this subsequently led to political burden for more housing credit. This would then lead to distortions within the borrowing market of the financial sector. What does Rajan mean by political pressures?
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
report of the national commission on the causes of the financial and economic crisis in
The U.S. financial crisis of 2007–2008 is considered one of the worst financial crises since the Great Depression of the 1930s. It almost made large financial institutions collapse and stock markets declined in a dramatic way around the world. The consumer wealth declined in trillions of U.S. dollars and played a significant part in the failure of key businesses and declines in economic activities. All these factors led to the 2007–2008 global recession and played a major role in contributing to the European sovereign-debt crisis.
Market crashes are nearly as old as the invention of money itself. But, as Gillian Tett underlines in Fool’s Gold, “the latest financial crisis stands out due to its sheer size”. Economists estimate total losses could sum up to $2000 to $4000 billion, a number surprisingly not dissimilar to the British Gross Domestic Product. In its post-mortem, the self-inflicted disaster has commonly brought to light the question: “Did bankers, regulators and rating agencies fail to see the flaws, or did they fail to care?” Importantly, it has also created a hunt for scapegoats and quick fixes.
Financial crises are a constant theme through generations. People can lose all their savings and somehow the richest 1% of the country will stay above the cumulative distributive mean of average earnings. It seems that everyday working middle class people are effected through these catastrophes losing all of their savings and future generations are now forever. Through evaluating the similarities and differences between the Great Depression of the 1930’s and the Great Recession of 2007/2008, we can learn how future financial crises can be avoided.
Cabral, R. (2013). A perspective on the symptoms and causes of the financial crisis. Journal of Banking & Finance, 37, 103-117
A report compiled by the U.S Financial Crises Inquiry Commission shows that the infamous global crises could have been avoided. It pointed out that failure in different financial institutions including the Federal Reserve accelerated the crises. Lehman brothers; one of the three largest investments banks in the United States has been cited in the financial crises in 2007. The bank went bankrupt and it had to be sold in September 2008 (Currie, 2010). The other two banks Morgan Stanley and Goldman Sachs had to become commercial banks where more regulation was done. The collapse of large and significant financial institutions like the Lehman Brothers propagated the economic crises. Investors withdrew over $150 billion from the money funds in the USA in two days after the collapse of the Lehman Brothers. This caused the money markets to get unstable thereby nee...
This essay will examine the causes of the 2008 Global Financial Crisis (GFC) from a Marxist perspective. This paper will specifically examine and critique how Marx’s Theory of Crisis can be applied to understand and interpret the underlying structural causes of the 2008 Global Financial Crisis.
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.
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
The most recent global crisis has rejuvenated interest in the relationship between inequality, credit booms, and financial calamities. Many analysts propose that rising levels of inequality led to a credit boom and eventually to a financial crisis. Others, however, have distanced themselves from that notion arguing that while inequality can be blamed for many things, the global crisis may not be one of them. In deriving a personal stand regarding the above predicament I will have to evaluate the different ideologies that most economic scholars have applied in deriving their conclusions on whether the cases of inequalities in the world’s population mostly in the US, contributed to the recent economic crisis or not.
Weiss, M.A. (2009) ‘The Global Financial Crisis: The Role of the International Monetary Fund’, CRS Report for Congress.
CARMASSI, J., GROS, D. and MICOSSI, S. (2009), The Global Financial Crisis: Causes and Cures. JCMS: Journal of Common Market Studies, 47: 977–996. doi: 10.1111/j.1468-5965.2009.02031.x
Velde,D.K (2008). The global financial crisis and developing countries. Available at: http://www.odi.org.uk/resources/download/2462.pdf (Accessed: 5th August 2010).
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.