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Financial Crisis - Research Paper Example

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Financial Crisis Name University Introduction The global financial crisis has substantially damaged the global economy. The year of 2007 brought the emergence of the global financial crisis. Many experts call it a recession as it has substantially diminished the GDP, real income, industrial production, employment and so on…
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Download file to see previous pages During the period of late 1990s and the early years of 2000s, a considerable number of developing countries had deposited their savings in the investment and commercial banks of the United States of America. This provided a supplementary liquidity in America. The banks and other financial institutions had more funds than the avenues for the investment. The excessive liquidity convinced many financial institutions and banks to extend lending even to the individuals and institutions that did not have a favourable credit history. The attacks of 9/11 also contributed its part. Soon after the attacks of 9/11, the Federal Reserve found it reasonable to decrease the interest rates as it would motivate consumer confidence and increase consumer spending as well. In the subsequent parts of this paper, definition of recession is provided. Subsequent to that, the causes of global financial crisis segment have been included. It is followed by the portion encompassing the effects of the global financial crisis. Before the conclusion part, lessons from the global financial crisis have also been provided. Definition Roland Reagan once said that recession is when your neighbor loses his job and depression is when you lose your job (Eslake, 2008). The recent wave of the global financial crises (2007-2009) substantially destroyed the international financial environment. And a considerable number of finance experts believe that after the Great Depression of 1929, the emergence of 2007 global financial crisis left negative impacts on the global economy. There are various authors who do not disagree to term it as the Great Recession. Recession has been defined as a period recording substantial decline across a particular economy by experiencing a real decline in Gross Domestic Product (GDP), industrial production, real income, employment and in other important pillars of the economy (Nueno, 2012). This represents that the aggregate picture of the economy does not look promising and the curve shows a downward tendency instead of going upward. Causes of the Global Financial Crisis Many causes engendered the global financial crisis. In the United States of America, the issue of the real estate bubble and the sub-prime mortgage loans fundamentally provided the root causes for the global financial crisis (Lannuzzi & Berardi, 2010). Furthermore, soon after the events of 9/11, the Federal Reserve did not increase the interest rates but decreased to the level of 1 percent with a financial objective of supporting the labor market. In addition to that, in the period of late 1990s and the early 2000s, a considerable number of developing countries from Asia and Africa diverted substantial amount of their savings to the commercial and investment banks in the United States of America (Shomali & Giblin, 2010). As a result, this excessive liquidity did not become a chance to support a formal and regulatory growth of the economy, but created the concepts such as innovative finance (D’Arista & Griffith-Jones, 2008). The provision and facility of sub-prime loans existed even before the emergence of the global financial crisis. In this regard, Udell (2009) highlights that the sub-prime loans were easily accessible to the loan seekers in the United States of America even before the global financial crisis. Basically, this type of loan is extended to those customers or clients who do not have ...Download file to see next pagesRead More
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