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Global Financial Crises: Differences, Impacts and Implications - Essay Example

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Global Financial Crises: Differences, Impacts and Implications The 2007/2008 credit crunch and the subsequent Euro zone crisis have similarities with the 1930 great depression such as the downturn of the economic market. However, the major difference between these crises is evident from their causes…
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Download file to see previous pages Other factors include bank failures, where in the 1930s, an estimated 9000 banks failed (Chossudovsky and Marshall, 2010). Other reasons include the American economic policy with Europe, where the United States aimed to protect the country’s companies and imposed several polices such as charging high taxes for imports. This, however, destroyed trade with other countries (Fabrizio, 2010). There was also the drought situation that hit Mississippi in 1930 that might also have contributed to the depression. The credit crunch however, can be said to have been solely triggered by the banks (Shiller, 2008). With the fall in interest rates from 1982 that was, banks were able to lend a lot of money. This enabled a boom in the construction industry using debt finance (Burns, Nye and Price, 2010). Financial agreements called mortgage-backed securities (MBS) were entered into by many institutions (Shiller, 2008). Such securities derived their value from the mortgage payments and the value of the houses. Increased competition among the mortgage lenders caused the mortgage lenders to originate risky mortgages to less creditworthy customers of borrowers (Burns, Nye and Price, 2010). Problems arose when the values of the houses begun to fall. The financial institutions that had invested in the mortgage-backed securities faced huge losses (Global Economics Crisis Resource Center, 2009). The fall in value also meant that the homes were worth less than the mortgage plans. This saw a drastic increase in foreclosures in 2006 (Burns, Nye and Price, 2010). This meant that the county had drained wealth from the consumers and eroded the financial strength of the financial institutions. The defaults on loan payment quickly spread from the housing market to other parts of the economy as the consumers could not pay the other loans that they had (Shiller, 2008). These losses also spread to other countries such as Europe. Another difference is that during the great depression, the governments were not willing to release money to the economy but in the 2007/2008, the world leaders were willing to print and invest money in the economy to salvage the situation. Another difference is that, during the 2007/2008 credit crunch, the value of gold went up while it did not change in the great depression (Chossudovsky and Marshall, 2010). Further, the economic situation in 2008 could not be solved by use of monetary policies since the economy seemed to be in a liquidity trap. The implications of the great depression, the credit crunch and the European debt crisis were wide spread in the economy and affected many countries in the world. During the great depression, the unemployment rate in the America reached 23.6% in 1932 and 25% in 1933 (Chossudovsky and Marshall, 2010). Business and families could not pay loans and therefore the default rate of loans increased causing more than 5000 banks to fall. Very many people were left homeless since their families had no source of income. In Australia, the country had depended on industrial and agricultural exports. The depression meant that the exports fell, which led to the collapse of several industries. Wages fell greatly as unemployment rate rose up to 29% in 1932 (Global Economics Crisis Resource Center, 2009). The Canadian industrial production fell by 58% while the total income fell by 56% by 1932, which was worse than the situation ...Download file to see next pagesRead More
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