Different economists have written about historical and current trends in the global economy. That helps predict future financial situations for different economies in the world. The most potent nations strive to maintain the leading positions while developing countries work to catch up with the rest of the world. However, none of that is a smooth sailing boat. Different events trigger various changes that affect the global economy. This paper focuses on the financial crisis 2008, its causes and the outcomes.
A financial crisis is an economic situation that is characterized by a decrease in the value of assets, the inability of debtors to pay their debts, and a liquidity shortage in financial institutions. That causes a deficit in the supply of money. It encourages investors to withdraw their savings from financial institutions. The latter have to sell their assets to cover for the shortfall. The world experienced a similar event during the financial crisis of 2008. Economists consider it as the most significant economic events since the 1930’s Great Depression. The bankruptcy of a crucial financial institution The Lehman Brothers triggered the crisis. The bank could not pay its liabilities of $700bn, and the US Government withheld its financial aid. That triggered the institution’s downfall disrupting the global financial system. However, economists believe that the event had multiple causes.
Causes of the financial crisis in 2008
In the mid-1990s, there was a boom in the US housing market. That encouraged mortgage lenders to hand out loans to potential home buyers with little restrictions. An increase in the demand for houses elevated their prices. Lenders needed more money to lend a high number of home buyers. They sold their loans to banks who sold them to Investment Banks. The latter combined their loans and sold them to investors all over the world as mortgage-backed securities called Collateralized Debt Obligations. Insurance companies joined in to cover the losses in case the home buyers defaulted. In 2005, a fall in home prices encouraged lenders to increase their interest rates. The subprime borrowers could not handle the increase. So they started defaulting on the loans. With that, the subprime lenders began to file for bankruptcy. By August 2007, the financial market in the US could not solve the problem alone. It affected the UK and Europe, too. Insurance companies could not cover the losses, and so the governments had to work together to prevent further financial catastrophe.
The global crisis had several adverse outcomes. It led to a fall in industrial production and international trade and impaired the confidence between households and businesses. The global economy went into recession, and the rate of unemployment increased. A decade later, most western countries have found it hard to recover from the crisis. The living standards in most states have increased as most governments have to rely on raising taxes and external borrowing. The political environment in leading countries also plays a significant role in the recovery process.
The effects of Financial Crisis 2008 are still evident in different countries. Economists fear that too much debt and over-leveraging in systematically significant institutions can trigger a similar crisis. It is crucial for regulators to implement strategic policies to avoid its recurrence. That is by monitoring the banking system and imposing higher liquidity requirements on financial institutions.