The Financial Crisis and Credit Crunch that occurred World-wide during 2007-09 Introduction Recessions played a key role in destroying several economies of the world. These recessions not only put the economies into depressions but also make a country extremely vulnerable towards meeting its financial obligations…
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Impact of Recession on Economy of United States The main reason behind the occurrence of any recession is decrease in the total expenditure of a country. Real GDP is considered as the most appropriate indicator which gauges an economy’s movement. If the real GDP of any economy speeds up its growth rate, the chances for the economy to grow in the broader respects increases sharply and a “boom” stage of business cycle can be observed. On the other hand, once people start sensing that their income would no longer be enough to manage their expenditures, they start cutting their expenditures. As a result, the overall confidence level of the people shakes up which in turn leads to a massive decrease in the overall expenditures of the people. The demand side gets shrink thus putting a stoppage to the overall production of the country. In this way, the production process suffers and experiences severe thus inviting a recession. It takes years for the people to believe that their expenditures would be met easily and they would be able to incur expenditure on luxury items (2008 Financial Crisis & Global Recession, n.d.). 1. Residential Investments In United States, the collapse of the housing market and sub prime mortgage was the major reason behind this whole debacle which pushed the US economy into dark valleys of recession. US economy experienced such a massive decline in its real GDP after post Word War II era, but at this time tight monetary policy was the main reason behind the recession. The tumbling situation of the housing market of US stated off showing its deeper effects in the last quarter of 2005 where the growth rate in terms of housing investment remained at breakeven level and did not find any increase. That was the first sign of the recession of the US economy (2008 Financial Crisis & Global Recession, n.d.). First quarter of 2006 reflected a decline of around -3.6% in the residential housing which was the first real shock to the economists. But with a massive and sharp decline of -16.6% in the growth rate of US economy buzzed the voice of a major financial crisis which eroded almost everything in later 2008. The same declining phase kept going along till the first quarter of 2009 when they reported a negative growth of around -32%. So overall it is basically the extreme underperformance of the US housing market that lead to a major debacle which turned into a global financial crisis and took every country into its effects (2008 Financial Crisis & Global Recession, n.d.). 2. Labor Market The effect of recession that started off in 2006 due to steep declines in growth faced by the housing market, hit labor market in late 2007. Since the inception of the housing market down fall in late 2006, the unemployment rate remained constant at 4.4%. That unemployment rate of 4.4% lasted till December 2007 and after that it just began to climb up so rapidly that in mid 2009 it reached to more than double of what used to be in December 2007 such that it amounted to around 9.4% in the mid 2009 which has been the highest unemployment rate since 1983. 3. Business Investments The recession also created mess on different other investment areas such that the all other kinds of investments followed the same track the one followed by residential investment sector. Business investment especially investments in respect of equipments and software started their declining pattern in the beginning of 2008 and the whole
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Banks and investors become wary of providing funds to financial institutions thereby forcefully increasing the cost related to debt products for borrowers. This also affects for individual borrowers as banks become more risk averse towards their loan portfolio.
The US is currently recovering from its worst recession in over 25 years. Most econ-omists consider the rapid rise in housing prices (the bubble) and the subsequent col-lapse in that market to be the primary cause of the recession. Explain what housing market circumstances were responsible for the collapse of that market.
This combination has been a growing problem in the past few decades. The origin of the global financial crisis can also be linked to the bursting of the oil price and housing bubbles, and excessive low interest rates among the key nations in the global economy.
1. What happened in the 2007 financial crisis? Through asymmetric information hence adverse selection, the 2007 financial crisis was caused by the action and inaction by the government (Lounsbury 2010), which created a platform over which both banks, and bank-like institution taking excessive risks specifically in the mortgage backed security market (BBC News 2009).
When considering the possible causes for this economic situation, fundamental defect of the free market system is the prominent reason for the crisis. In the US economy, a secure and sustainable economic order is not ensured by the economic regulatory. As a result, banks and financial institutions in the developed countries are not restricted from spending more than what they can afford.
system had been increasingly deregulated in an attempt to achieve greater efficiency, but the increasingly liberal policies have progressed to a point when innovative contracts have been implemented with less than diligent study and with a disregard for risk in the face of
The financial collapse was worsened by the financial institutions ability to use the loopholes existing in capital regulation. Banks increased debt while maintaining their capital requirements. This was made possible by moving assets into special
In the case of the Eurozone, countries like Portugal, Ireland, Greece, and Spain (PIGS) spend a lot of money borrowed from the market to finance subsidies and bank bailouts among other expenses (Belkin, Weiss, Nelson & Mix 7). The countries got greatly
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