Macroeconomic Factors For The Financial Crisis

The complete loss of investor confidence impacted stock markets globally. Securities suffered large losses during late 2008 and early 2009. As the restrictions on credit gr... ... middle of paper ... ...factoidz.com/what-caused-the-great-recession of-20082009/>. Nabli, Mustapha K.. The Great Recession and developing countries: economic impact and growth prospects.

The crisis has contributed to the failure of key businesses, substantial financial commitments incurred by governments, declines in consumer wealth estimated in the hundreds of billions of US dollars and a significant decline in economic activity. Many different causes have been suggested by financial experts howev... ... middle of paper ... ...tility. The banks seemed to be happy with the fair value accounting method when it was producing profits however as soon as the markets collapsed and the banks began losing money, accusations began to arise that the method was not worth the problems it had caused. The fair value method did not directly cause the crisis however its weaknesses where highlighted due to the declining market. The FCAG are in the process of investigating and improving the current accounting method which should once again restore the confidence in the markets.

The Global Financial Crisis and its Impact on EU Governments Summary Despite the efforts of the Federal Reserve and Treasury Department to prevent the collapse of the U.S banking system, the Global Financial Crisis (GFC), also known as the Financial Crisis of 2007-2008, since the Great Depression in the 1930s, was considered to be the largest and most severe financial event, which reshaped the world of finance and investment banking[1]. During this period, Millions of Americans lost their jobs; millions of families lost their homes; and good businesses shut down [2]. The main cause of the GFC was the Subprime Mortgage, high risk mortgage lending, of financial institutions, such as investment banks in the United States. However, there were other factors, which contributed to the GFC, such as regulatory failure, inflated credit ratings, and investment bank abuses. As a result, the 4th largest bank, Lehman Brothers, filed for Chapter 11 bankruptcy, stock-broking firm and Merrill Lynch, an investment bank, were taken over and Goldman Sachs and Morgan Stanley sought banking status in order to receive protection from bankruptcy [3].

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.

This recession saw governments globally lending large sums of money to funnel into the economy to ensure survival; this takes me on to the next example the issue of global debt. This directly affects decisions made by the UK government in regards to economic policy. In recent times the new Conservative government has made extensive cutbacks in health, education and other vital social services such as welfare and benefits. These structural adjustment policies are aimed at reducing economic debt; however these recent cuts have seen many UK households struggling to survive and have landed a solid blow to the increasing poverty situation in the UK. Although the Conservative government jus... ... middle of paper ... ... from certain areas will have a negative effect.

Besides that, corporate governance, interest rate and subprime mortgage are factors which causes credit crisis. As refer back to the happen of financial crisis in 2007-2008, these breakout made few large global institution's approach insolvency thus the whole financial sector of the world was affected. The government had given a lot of support to slow down the effect and recovery of the economy in their country. In fact, one factor itself does not cause this mess. The credit crisis is derived from a bunch of economic factors.

Fiscal policy involves changes being made in government expenditure and or taxes with the aim of reaching certain economic objectives, such as stable prices, low unemployment and ultimately economic growth (Arnold, 2012). Arnold (2012) explains that fiscal policy may be expansionary or contractionary depending on the government budget. In mid-2007 the first signs of upset became visible in global financial markets (Stark, 2010). Stark (2010) explains that these signs were connected to a swiftly increasing crisis in the sub-prime mortgage market of the US, which had an negative affect on the prices of related structural financial products owned globally by banks and other financial institutions. Eventually, European banks were subjected to the unravelling of harmful financial instruments and to plummeting commodity prices and Western consumer demand for imports (Love & Mattern, 2010).

Robert E, Hall is a Macroeconomics professor at Stanford University and within his paper he discusses why the economy falls to pieces after a financial crisis. The main issue which is highlighted throughout the paper is financial friction and its impact on different aspects of the economy. Hall begins the paper by diagnosing four components of real GDP after the second quarter of 2008, highlighting that the huge decline in the U.S economy following the crisis was confined to investment. Hall states that standard principles of macroeconomics hold that interest rates are the regulator of investment and savings. When demand is strong interest rates are high, so investment projects with lower returns fail to make the bar.

The problems arrived over a period of time from 1995 to 2008. The first and main problems that lead to the economic collapse was sub prime mortgages. Sub prime mortgage is a certain kind of loan granted to people with poor credit histories, who which wouldn’t usually be qualified for conventional mortgages (Investopedia). These sup prime mortgages would backfire on banks across the nation resulting in huge financial loses. According to USA Today, “Housing crisis deepens.

The credit crisis is referred to as economic downturn by credit squeeze, provision of doubtful debt and bankruptcies among others. (IMF, 1998) Credit crisis is known as a credit crunch, it is an extension of recession. According to the Ocaya (2012), Credit crisis is a sudden shortage of loan and tightened the requirement of economy and society needs of getting loan from financial institutions. In such situation, lender started keeps the cash and stop lending money because they are worry about a large of debtor bankrupt and mortgage defaults. Lender had adjusted the interest rate of borrowing to unaffordable rate.