The Global Financitl Crisis a.k.a. The Great Recession

Introduction

The Global Financial Crisis (GFC), also known as the great recession, has impacted economies on a global scale in 2007 - 2008. Its effects have been far reaching and prolonged, with economies still bearing the consequences more than half a decade on, although recovery seems to be picking up albeit rather slowly.

A myriad of factors caused the GFC and can be traced back to even before the widespread issuing of subprime loans and mortgage backed securities due to securitisation and financial deregulation. However, the one thing that remains clear thus far was that the GFC was largely attributed to the bursting of the housing bubble in the United States as a result of poor regulation and ease of borrowing. With an increasingly globalised economic landscape, and with the US remaining as the financial superpower, a failure in the economic system in the US as well as its financial institutions such as Lehman Brothers, has led to the recessionary plight that currently dwells in the global economy. To explain the cause of the GFC as merely because of the risky subprime mortgages and credit derivative investments would thus be rather myopic. However, one should trace back the accumulation of factors and the given time effect which set the stage for an eventual downfall. In this essay we will explore various key factors which were attributed to the cause of the GFC.

Interest Rates

With the US economy in a recession due to the dot-com bust, with valuations in a bear market but being offset by earnings in a bull market, US companies were making significant earnings but there was little confidence in the market.1 With consumer sentiment already on the downtrend since the dot-com bust, the September 11 terrorist attack in 2001 exac...

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...ramount to prevent excessive current account deficits. Without such prudence, it would make it difficult to stem price bubbles that could adversely affect the economy.

Ricardian equivalence has failed to assess in this case the forward looking consumer behaviour, with budget deficits today resulting in higher future taxes. In fact consumers were spending more with the ease of credit and can be seen from the housing bubble as well as subprime loans that contributed to it as well. The innovation and securitisations including the excessive amount of speculation and leverage were also a contributory factor. With such inter-relatedness in the global economy, it is becoming increasingly important for consumers, corporations, and governments to be able to exercise efficient and effective financial prudence to prevent such a catastrophic economic event again in the future.