What caused the Global Financial Crisis (GFC)?

What caused the Global Financial Crisis (GFC)?

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.

One of the causes of the GFC was the housing bubble, where house prices rose sharply in the US, these patterns of housing prices were similar to those in other major financial crises of the twentieth century (Claessens et al, 2013). By the early 2000s housing was the new investment it was a global boom. Low interest rates enouraged households to think of home-ownership as the fastest way to acquire wealth instead of waiting for savings to accumulate. The US housing market prices r...

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...d the lack of regulations within the financial sector, as high credit risk applicants were given unstable loans. This led to the bursting of the housing bubble in the US in 2007 as many borrowers were unable to afford their mortgages on their houses, which led to an large number of foreclosures and houses entering the market, which in turn led to a decline in house prices creating a vicious cycle. The interconnectedness of the banking system made it more exposed to risks, which explains why the US housing bubble bursting and the collapse of the Lehman Brothers in Wall Street had a knock-on effect in the economies around the world most notably in Europe in addition to the fact that interbank trading and lending stopped. The lack of transparency and regulations meant that bankers were able to exploit and manipulate the financial system without being held accountable.