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The Global Financial Crisis - Essay Example

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The global financial crisis began proving its adversities by mid 2007. By the end of 2008, a great percentage of the financial institutions had collapsed leaving the government to devise means of alleviating the situation. …
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The Global Financial Crisis
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"The Global Financial Crisis"

Download file to see previous pages Firstly, the credit crisis played a significant role in determining the global financial crisis. Kolb (2010), brings out the point that, as at mid 2007, a great number of investors in the USA had lost trust in the value of mortgages as the government had offered loans to too many people that could not manage paying back the debts. In response, liquidity was evident, which resulted to the US disbursing more funds to the financial market. By 2008, the situation worsened, as the stock markets had totally disintegrated. Nanto (2009) argues that the stock markets were extremely unstable. For fear of the worst, the investors did not have any trust in the government and opted to withdraw. This argument concurs with that of Keynes theory that specified that, spending by the government is the major reason behind UK’s crisis. In the case of employment, Keynes (2006) reported that employment rates increase the amount of spending and that wages must be kept constant. Secondly, yet another factor that led to global financial crisis is that, the US government had granted loans to many individuals, even those who could not pay the debts, which put the market at a higher risk of collapsing. Igan et al (2010) uttered that the value of the mortgages dropped with the borrowers being left with losses to count. The banks were faced with a lot of deficits to deal with, forcing them to repossess their assets that were of lesser value. Chacko et al. (2011) attribute excessive lending to the major contributor of the global crisis, as the banks found it tasking to deal with the liquidity issue, and the low lending rates due to misappropriate lending by the banks. Lack of proper regulation measures in terms of lending - unethical behavior, cost the globe financial crisis that could not be solved in a day. It is vital that Fredrick’s thoughts are applied in the case of solving the crisis in UK. In his work, he notes prices must be well monitored so as to avoid inflation in a country. However, his thoughts do not match with those of Friedman (2004) who believes in a free market, devoid of barriers from the government. Thirdly, the collapse of Lehman Brothers on 14th September, 2008, marked a new phase of the financial crisis (Savona, Kirton & Oldani, 2011). Due to their collapse, net capital inflows in the financial market reduced, as well as in the domestic stock markets. Griffiths &Wall (2008) attest to the fact that, the concerned governments, just like business economics states, had to come up with solutions to rescue their financial institutions. The housing and stock markets were in a terrible situation. Furthermore, Doyle (2008) notes that, though the Lehman failure had no direct implication on the domestic financial status, massive changes were experienced in the external market status. Large capital outflows were experienced, external commercial borrowings decreased, and acquiring credits became more difficult. Statler & Shrivastava (2012) revealed that by December 2008, the US reserves recorded losses of an approximate thirty three billion from fifty four billion. On another point of view, Aizenman & Jinjarak (2010) emphasized that UK is one of the countries at its peak in terms of spending on reducing the impacts of the 2008 crisis. The government employed the fiscal policy approaches in an endeavor to handle the crisis, as well as a free floating exchange rate to curb inflation. Maximilian (2009) accentuated that fiscal policies spare the country from a decrease in the demand for domestic goods. The UK government in addition, reduced its expenditures and increased the taxes from seventeen ...Download file to see next pagesRead More
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