Causes Of The Financial Crisis

762 Words 4 Pages
A fundamental break down in the existing economical arrangement was fabricated in the financial global crisis that started in summer 2007 and surprised many nations. Commotions in the financial world (banks) had an impact on the real economy in terms of people’s livelihoods. This financial crisis is globally significant to us, as it took place in the heartland of capitalism, the U.S., which is the richest most successful dominant capitalist power.
The key trigger of the financial breakdown was, easy lending of the U.S. housing market, in an era of very low interest rates and reduced regulations. There was an astonishing housing boom across the U.S. and subprime lending, issuing loans to borrowers with low credit rating, became more frequent.
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The economy can recover in short term, whereas in a moderate reform, economic recovery would be prolonged. In my opinion, there should be a balance between moderate reform and radical overhaul, for instance, government policies can be implemented to create more jobs in the economy. However, the cause of the financial crisis was caused due to weak government regulations and shows that the financial sector relies partly on the government. Therefore, if there was a free market and the government did not inject money to bail banks out, the banking system would not have recovered from the …show more content…
In my opinion it is not just the question of how much regulation, but having the right regulation. During the crisis, the bank of England could invoke monetary tools to reduce interest rates to endorse interbank lending as they did in March 2009; ‘The Bank of England has cut interest rates to 0.5% - a fresh all-time low - and says it will now boost the money supply to help revive the economy.’ Nevertheless, this may not always be as effective; it was during the crisis when the bank of England settled on lowering interest rates from 5.75% to 0.5%, the financial sector ended up being unsuccessful due to deflation. Accordingly, the bank of England decided to use measures such as quantitative easing by injecting £375 billion into the economy, which can be implemented to rectify the liquidity issue that was a key cause of the financial crisis. Quantitative easing generates money which it uses to buy government bonds or assets, which stimulates the flow of money into the economy. This evolves to boost economic activity and financial sectors are encouraged to lend to increase consumer spending. However, there is a theoretical criticism of quantitative easing, as Keynesians theory states “If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between the cup and the

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