Causes Of The Global Financial Crisis

The global financial crisis can be dated back to July 2007 where the well-known term “credit crunch” had happened. The credit crunch was the period where investors’ lack of confidence in the US housing system caused a liquidity crisis. This happened because of defaulted sub-prime loans causing banks to repossess houses and lands making them less valuable than what they originally sold them for. Many can say that this was the initiation for the crisis but the effects of the crisis grew more intense after the stock market crash and the collapse of the Lehman Brothers. Economies around the world were affected by the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world.

The causes of the global financial crisis are found as early as the 1930’s during the Great Depression. Regulations designed during the Great Depression were a cause of the rising inflation of the US dollar. President Nixon realized the harmful effects that would come with inflation so he set up programs which would allow floating interest rates promoting deregulation. Banks and financial institutions ignited ways to eliminate the regulations that restricted them, while at the same time individuals became more interested in their own monetary transactions and savings. Local banks were being bought out by larger institutions which then expanded to offshore locations assisted global financial liberalization.

Financial innovations were a significant factor that caused the global financial crisis making it easier and faster to make transactions around the world. Among them securitization and hedge funds were the most recognized. Securitization made it easier for a person to obtain large s...

... middle of paper ...

...nvolve the negative outcomes that occurred. The crisis significantly reduced global trade, caused numerous home foreclosures and created high levels of unemployment. Along with the cons, people can argue that there are some positive effects that also came out of the crisis. Economists think that because of the crisis, important flaws were pointed out that are essential to fixing the economy. These flaws include regulating some of the financial innovations, being more attentive to risk management when lending out loans, and monitoring executive compensation. My individual analysis of the crisis focuses on these positive effects. I believe we can learn from our mistakes so we don’t repeat the past. If financial institutions and governments correct the corruption and inflation in our economy we can emerge back to a more stable and trustworthy stock market and economy.