Global Financial Crisis: Causes and Effect Essay

4054 Words Apr 4th, 2012 17 Pages
Introduction

The financial crisis that began in 2007 spread and gathered intensity in 2008, despite the efforts of central banks and regulators to restore calm. By early 2009, the financial system and the global economy appeared to be locked in a descending spiral, and the primary focus of policy became the prevention of a prolonged downturn on the order of the Great Depression.

The volume and variety of negative financial news, and the seeming impotence of policy responses, has raised new questions about the origins of financial crises and the market mechanisms by which they are contained or propagated. Just as the economic impact of financial market failures in the 1930s remains an active academic subject, it is likely that the
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Government-Mandated Subprime Lending: Federal mandates to help low-income borrowers (e.g., the Community Reinvestment Act (CRA) and Fannie Mae and Freddie Mac’s affordable housing goals) forced banks to engage in imprudent mortgage lending.

Excessive Leverage: In the post-2000 period of low interest rates and abundant capital, fixed income yields were low. To compensate, many investors used borrowed funds to boost the return on their capital. Excessive leverage magnified the impact of the housing downturn, and deleveraging caused the interbank credit market to tighten.

Financial Crisis & U.S economy

In 2008, the United States experienced a major financial crisis which led to the most serious recession since the Second World War. Both the financial crisis and the downturn in the U.S. economy spread to many foreign nations, resulting in a global economic crisis.
On September 15, 2008, Lehman Brothers, one of the largest investment banks in the world, failed. Over the next few months, the US stock market plummeted, liquidity dried up, successful companies laid off employees by the thousands, and for the first time there was no longer any doubt a recession was upon the American people.
Eleven months after the fall of Lehman Brothers, the U.S. remains in a state of limbo. Proposals for stimulus packages and other bailout plans have provided some relief, but it seems the most

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