The Economic Crisis: Causes Of The Financial Crisis

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The global economic started in the middle of 2007 and lasted about five years. The crisis was characterized by massive withdrawal of investors from markets as a result of reduced confidence, volatile world stock markets and reduced liquidity for banks which were unable to offer or obtain credits. Some financial institutions were facing the risk of collapse. Governments around the world rushed to save these institutions and cushion their economies from the economic crunch through what were popularly referred to as economic stimulus programs.
Causes of the Financial Crisis
A country’s trade balance as a major depicter of income generation versus domestic consumption. If a country’s imports value exceeds its exports value, it means that the country
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Such errors usually result to losses since traders mistakenely forecast gains for unprofitable ventures. This level of optimism is so high that the pessimism levels are below the market equilibrium at which transactions avoid losses. These levels of pessimism that are below the equilibrium are characterized by numerous transactions. Due to the availability of low interest rated loans, many people had access to funds which they invested mainly in the housing and stock markets. The increased demand definitely increased prices. However, many investors estimated that their investments would generate income that would be enough to settle the loans. This estimation was wrong and created a trader error. There was high spending on fixed asset investments and reduced income generation. This created a balance of trade deficit, leading to the financial …show more content…
Cutting on imports is of little use in such situations since it is a cut back measure where the demand deficit still remains. The best option is to increase the amount of exports such that they exceed the imports value. For example, in the Eurzone, Italian, Portugueese and Spanish governments increased their exports to a point that they were able to match Germany’s exports. Most of these exports were sold to non-Eurozone nations. The increased rate of exports helped contribute to the balance of trade. Additionally, the nations made efforts to strike a balance between investment and saving. Increased saving reduced the need for foreign borrowing. However, the impact of this was reduced productivity and increased unemployment rates.
The first measure that governments took in fighting the recession was to cushion their currencies against depreciation. The conversion of portfolio assets into liquid foreign currencies percieved to be more stable created an increased demand for foreign currencies and reduced demand for local currencies. This exposed local currencies to the risk of depreciation. This outflow created massive deficits in the periphery. Governments came up with economic stimulus programs to finance the capital flight deficit. In the United States and Australia for example, the economic stimulus programs were

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