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Global Financial Crisis
The 2008-2009 financial crisis went down on record as the worst since the 1930’s Great depression. According to Dzikowska & Jankowska (2012), a financial crisis is the period when financial markets experience a disruption thus making it difficult for them to conduct business and channel funds to prospective investors. The crisis not only imposed a huge threat to financial institutions that almost collapsed, but also resulted to bank bailouts by national governments in addition to stock market down turns globally (Shah, 2013). Apart from elaborating main causes behind the 2008-2009 financial crises, the essay will also provide more information on the reasons why it happened.
Although the world is yet to recover from the financial crisis, studies show that the main cause emanates from the misunderstanding of its roots (Crăciun & Ochea, 2014). Six years down the line, effects of the financial crisis are still present as if it was just yesterday. Most of the affected nations, especially in Europe are still grappling with the effect that came along with the crash. Studies show that there were several factors associated with the crash. One of the most recognized cause of the financial crisis was bursting of US housing bubble. This was due to the laxity in the loan policies, whereby it was quite easy to obtain loans such as mortgage auto and credit card (The Economist, 2013). This later on resulted to financial institutions, which had expected a positive income, ending up with huge loses and debts.
The decline in the prices also caused homes worth less than mortgage loans be forced to financial incentives in order to qualify for foreclosure. Studies showed that the crisis was avoidable since the main reasons behind the crash were financial regulation failures by institutions such as banks and governments. Another reason is the dramatic collapse of corporate governance, which was because of the reckless manner in which financial institutions were behaving (Shun, 2013). For instance, financial institutions were involving themselves in risky affairs whereby they would take part in excessive borrowing patterns hence putting financial system in direct collision with crisis (Shun, 2013). Apart from financial institutions risky affairs, another reason behind the crisis is ill preparedness by nations on matters relating to financial crisis. Key policy makers in most of the affected states never saw the crisis approaching due to lack of full knowledge on the financial systems.
Before the global financial crisis outbreak, many financial institutions around the world became highly leveraged hence increasing their urge to involve themselves in risky investments that resulted to rapid reduction of their resilience in case they were to incur loses (Crăciun & Ochea, 2014). This was because most of these leverages were acquired by means of complex financial instruments like derivatives and off-balance sheet securitization. It is because of these complexities that creditors and regulators were unable to monitor the risk levels of financial institutions. This resulted to an increase in the rates of bankruptcy that later on led to government bailouts (Shun, 2013). After the collapsing of US housing bubble, what followed next was a continuous decline of the economy (Shun, 2013). For instance, increase in vital commodities such as the price of oil that tripled. According to financial experts, this was due to speculative manner in which money was flowing from investments such as housing into commodities while others ended up in monetary policies.
A financial crisis is normally the period when a nation is unable to conduct business usually because of the disruption of financial markets. The 2008-2009 financial crisis went down as one of the most severe to ever happen. This is because its effects were fatal to the extent that some financial institutions were at risk of collapsing. Studies by financial experts showed that apart from financial regulation failures by institutions like banks, another reason behind the crush was collapsing of corporate governance due to reckless behavior by financial institutions.
Crăciun, L., & Ochea, M. (2014). The dimensions of the global financial crisis. Theoretical & Applied Economics, 21(1), 121-130.
Dzikowska, M. & Barbara J. (2012). The Global Financial Crisis of 2008–2009 and
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Shah, Anup. (2013). “Global Financial Crisis.” Global Issues. Retrieved on 28 April 2014 from http://www.globalissues.org/article/768/global-financial-crisis
The Economist. (2013). The origins of the financial crisis. Retrieved on 28 April 2014 from http://www.economist.