The 2012 Global Financial Crisis Essay

The 2012 Global Financial Crisis Essay

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The 2008 Global Financial Crisis was the most severe economic disaster the world has faced since the Great Depression of 1929. The root cause of the GFC cannot be traced back to a single event but rather, a culmination of events such as debt accumulation, low interest rates, inappropriate risk assessments and the ill-informed decisions to purchase assets with rising prices through debt (Taylor, 2013). Given the rapidly changing nature of the financial markets, increasing globalisation and uncertainty about the future, it is misinformed to believe that the GFC was a once-in-a-hundred-years event and will not occur in the near future.

Post Keynesian economists have attributed the GFC to the instability of the financial system and the inability to assess systematic risk. Minksy’s theory of the instability of the financial markets predicted the GFC. Minsky stated that as the economic boom proceeds economic agents take on more debt and hold less liquid assets which exposes them to a more fragile position. In the years leading up to the GFC, the household sector in the US, UK and Canada saw an increase in their debt ratios as well as an increase in leverage ratios with banks and financial institutions (Lavoie, 2009). One of the largest failures of the financial sector was its overconfidence and uncertainty of the future. In political economics, uncertainty of the future and the importance of history play a great role in shaping current and future events. For the financial markets, decisions are influenced mainly by confidence and “animal spirits” of the entrepreneurs; there is no set structure that bankers can rely on. Thus, the financial sector relies on recent history to make decisions for the future. In their analysis of history, ...

... middle of paper ... and their liquidity management was heavily reliant on leverage and securitization (King, 2012). As a result, banks began to provide loans to borrowers who had low creditworthiness and began to package their debts in the form of these new financial assets. As well as this, credit rating agencies, which received income from banks that were interested in obtaining higher credit worthiness through insurance, failed to appropriately assess the risk of the products they insured (King, 2012). Furthermore, the rapid pace of globalization and the rapidly changing financial markets, together with the increasing greed of economic agents, will eventually lead to another financial crisis that may come sooner then expected. The catastrophic consequences of the GFC may not be enough to restrain risky behavior by banks and investors and the creation of new financial assets.

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