Nobody downloaded yet

Roots and Causes of the Economic Crisis - Literature review Example

Comments (1)
Summary
This paper will comprehensively throw light upon the roots and causes of the current economic crisis. All the major causes will be expansively presented in this paper. The valuable lessons learned from the crisis will also be thrown light upon in this paper…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER95.7% of users find it useful
Roots and Causes of the Economic Crisis
Read TextPreview

Extract of sample "Roots and Causes of the Economic Crisis"

Download file to see previous pages Overvaluation in real estate is perhaps the biggest cause of the current economic crisis, it is better known as the subprime crisis in the US. The likes of Lehmann Brothers and other financial services went bust because they kept issuing a credit to the people who thought the property price would increase and they would be easily able to pay off the debt that they are borrowing. It did not turn out that way and there was a short of equity, this is exactly why the financial institutions went bankrupt. Overvaluation is the biggest factor that caused the current economic crisis. Factors like bad income tax practices have added insult to injury, bad mortgage lending also contributed heavily to this current economic crisis. “The way to address the root cause is to let house prices drop to where an average house is within the means of an average household. (Or, alternatively, boost the income of the average household to the point that they can afford an average house. But that's very hard. Letting houses prices go on falling, although painful for everyone who owns a house or who has lent money to someone who owns a house, is very easy.)” (Root Cause of the Financial Crisis) Some of the main plausible reasons that caused the recent financial crisis have been identified in the above sections. According to Brunnermeie (2009), cheap mortgage financing to sub-standard borrowers fuelled the boom in the U.S. housing market. Three factors were primarily responsible for the fall of the housing market in the U.S. (which in essence, constituted a very small segment of the financial market in the country) transforming into a global contagion. First, the “originate and distribute” banking model, together with the high rate of securitization, led to declining lending standards and made it impossible to re-price the complex structured products. This significantly eroded the confidence level of banks, thereby disrupting the inter-bank markets and credit flow. Second, banks relied heavily on short-term funding sources, hence raising the risk of funding. Finally, the ever-growing integration of global financial systems and the increasing interest towards structured financial instruments quickly transmitted the crisis to all the major regions of the world.
Gourinchas (2010) focused on the role of monetary policy in the recent financial contagion as well as the role played by exogenous influences, particularly the rising external deficits referred to as ‘Global Imbalances’. According to Gourinchas, both explanations are not satisfactory as the sole reason behind the crisis. This opinion has also been corroborated by Caballero (2009), who suggested that the primary reason for the crisis lied in the “imbalance” between worldwide demand for secured liquid instruments of debt in the U.S. and abroad, and the limited asset supply. Per Gourinchas, the imbalance in safe assets impacted the monetary policy effects and the external deficit patterns of the U.S. (Gourinchas, 2010, p.1). The rosy macro-economic picture that prevailed prior to the year 2005 was blemished by the overheated housing markets and the rising external deficits in the U.S. During the period between January 1997 and January 2006, the S&P Case Shiller Composite-10 Home Price Index rose by 128% in real terms. The household leverage, i.e. the household debt as a proportion of disposable household income, increased substantially with the rise in the prices of real estate. ...Download file to see next pagesRead More
Comments (1)
Click to create a comment or rate a document
li
lillie60 added comment 4 days ago
Student rated this paper as
I didn’t know how to start my text. "Roots and Causes of the Economic Crisis" helped me out a lot! Especially the list of first sentence was valuable.

CHECK THESE SAMPLES OF Roots and Causes of the Economic Crisis

Economic Crisis in America: Causes and Consequences

...22 February Economic crisis in America Since 2008, the global economy has been facing an economic crisis that is comparable to the Great Depression that occurred in the 1930’s. Some of the world’s leading economies, such as America, have been affected the worst. This economic crisis has not taken the world by storm. In fact, it has been building up for many years, particularly in America (Acharya, 9) There are many reasons why the American economy is in recession. The long lasting boom in the housing market in the U.S., the deficit on the balance of payments in America, the lending of capital by the U.S., the loose monetary policy that...
2 Pages(500 words)Essay

European causes of its 2012 economic crisis

...? European Causes of its Economic Crisis Introduction In 1992, the Maastricht Treaty officially formed the European Union (EU), and initiated the adoption of the euro currency. The Maastricht outlined the conditions for European nations aiming to be a Eurozone member. Each member had to organize its finances by: (1) guaranteeing an annual inflation not exceeding 1.5 percent; (2) maintaining finance debits only up to a maximum of 3 percent of GDP; and (3) keeping a debt-to-GDP ratio below 60 percent. To pass the criterion, the European nations agreed to tighten budgets by decreasing public expenditures and increasing tariffs. 1 The euro, being the EU’s sole currency since 2002,...
6 Pages(1500 words)Term Paper

Causes of the US Economic Crisis - 2007 to Present

...Causes of the US Economic Crisis - 2007 to Present Many economists consider the 2007 to economic crisisas one of the worst economic downturns that US has encountered since the Great Depression. The US financial market suffered recession, financial institutions collapsed, the mortgage market and many other businesses suffered. The Financial Crisis Inquiry Commission’s report on the economic turmoil indicated that the melt down was an artificial problem which emanated from the operations of the financial institutions. The report identified the following causes of the financial crisis. The...
3 Pages(750 words)Term Paper

Economic Crisis

...? 2008-2009 Economic crisis The paper focuses on the root causes of the tremendously loathsome economic crisis encountered by the world, especially the United States of America (USA) in 2008-2009 along with the rigorous steps employed by the US government to stabilize and uplift the economy’s condition from the devastating financial boogie trap. Primarily the focus is stressed on the proximate causes that ignited and spurred up the economic downturn. In the subsequent step, endeavors made by the US government in the stabilizing mechanism of the economy is explained with particular emphasis on the role of President, Congress, Secretary of the State, and Treasury Secretary in order to abolish the adverse consequences on the economy... , from:...
8 Pages(2000 words)Research Paper

Roots and Causes of the Current Economic Crisis, Monetary Policy

...?Client’s 10 August The great economic depression in 1930, in the US, was triggered off by the collapse of the US stock market which is now known as Nasdaq. It was the worst period of the US history; people slept on Hoover blankets and had no money to spend. The economy of the US recovered from this setback only to suffer from a similar setback of a lesser magnitude in 2008, which is called recession. This paper will comprehensively shed light upon the roots and causes of the current economic crisis. All the major causes will be expansively presented in this paper. The valuable lessons learned from the crisis will also be discussed herein. Bear Stearns, AIG, Lehmann Brothers, Northern Rock, and Goldman Sachs are some elite names... . It is...
7 Pages(1750 words)Research Paper

Economic crisis

...-term security was drained. The advent of globalization has make it even more difficult for the world, as the loss faced by one part of the world will directly effect the economies of the other half. Eventually, the crash of the entire world's economy was at stake. How did this happen What were the events that led up to it Will it ever end Is the debt bigger than the size of the economy Who is to determine who losses money and who can get his investments back Is this crisis only for the poor or will it make the rich poor According to Day, the main cause of the economic crisis is the "excess credit creation" over a long time period. As mentioned earlier the interest rate was really low and there was creation of 'artificial' money... World &...
12 Pages(3000 words)Essay

Economic crisis

...The global economy is having a serious downfall since last few months. The seriousness of the problem has affected most of the countries in the world. The people are getting directly influenced by the sudden movements in the economy. Employment, Money flow all has been affected negatively by the aftermaths of the economic crisis. There is a sudden need of remedial action in order to make a change to the negative effects of the economic development. The consequences of the sudden impulse in the economy are unfolding its unseen aftermaths gradually and this effect is being penetrated in the grassroots level of the society. It is an urgent need of the hour to put a stop to the ‘carcinogenic’...
3 Pages(750 words)Essay

Causes of 2008 Financial Crisis

...Causes of 2008 Financial Crisis The financial crisis experienced in 2007-2009 was a global economic crunch, and economists d it as the worst of its kind to happen after the Great Depression in 1930. According to Wallison (2009), key issues that led to the crisis included increment and sudden reduction in house prices as well as increases in default rates in 2006. Furthermore, the collapse of stock prices in 2008 speeded by Bear and Lehman’s failures fuelled the crisis (Wallison, 2009, p. 3). Additionally, Thomas, Hennessey and Holtz-Eaki (2011) suggest that the main causes of the recession comprised the state involvement...
4 Pages(1000 words)Essay

The Causes of the Global Economic Crisis

...a profound effect. The outlook for developing countries looks good, which poses the possibility of those territories seeing increases that promote those countries past countries with established high incomes in economic stability. The high income countries need to be shrewd, but act without fear in order to maintain their status. The current placement of the economy provides for a situation where there cannot be a further stand still in which people and institutions are afraid to act, despite the fear that is rooted in the financial community. The global crisis, while boiled down to the fear of the bubble bursting in the real estate market as put against the fear of the rise in the...
10 Pages(2500 words)Research Paper

Economic Crisis

...Economic Crisis Task-1 The current economic crisis faced by developed countries including UK has forced them to take on macroeconomic policies which are relatively different in nature. Mounting public debt and higher fiscal deficits require certain structural changes in the way economies of these countries are being run. UK therefore also went on to make macroeconomic policy changes which reflected the current mood in developed countries. Broader level macroeconomic policy objectives include controlling inflation, increasing employment level while also achieving an increase in the level of output (GDP). However, in order to achieve a sustained level of increase in the...
10 Pages(2500 words)Assignment
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Literature review on topic Roots and Causes of the Economic Crisis for FREE!

Contact Us