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"What were the causes and effects of the global financial crisis in 2007 and three clear leasons for portfolio risk management that have emerged from this experience"
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The financial crisis of 2007-2009 caused disastrous effects in the US economy as well as numerous other countries of the world. The effects have been so severe that the world still struggles to return to normalcy.
The crisis is considered to have planted its roots since as early as 2001. This is the time when United States of America recovered from a minor recession due to the terrorist attacks and the dotcom bubble. Dotcom bubble was a stock market recession that took place due to the heavy investments in the dotcom companies. Many investments were made in the technological companies with the expectancy of gaining even greater profits. The US economy survived this setback in their economy but their minds feared the probability of an actual recession. Singh (2007) stated that the Federal Reserve decided to decrease the interest rate to 1.75% from a rate of 6.5% to avoid any occurrence of a recession. This lowering of the rate proved to be an attractive package for the people as many more individuals could finally make their dreams come true and make desired investments. What the concerned authorities did not predict were the consequences of such an increase of loans and mortgages.
Due to the decrease in the interest rates, the people became restless buyers and started applying for more mortgages and loans. The demand for houses appreciated the property prices to a great extent and lowered rate for rented properties. A greater element of encouragement was introduced in the market when Federal Reserve lowered the interest rate even lower to only 1% in the mid of 2003. This was done with the aim of keeping the economy strong. Singh (2007) stated that this rate was the lowest one that was witnessed in the past 45 years. This gave an even bigger push for the people to invest as much as they possible could.
Then, another factor was introduced in
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As International Labor Organization reported, unemployment has grown from 20 million to 50 million by the end of 2009 due to the crisis (Bresser-Pereira 2010, p. 499). This paper addresses the recovery process of the economic crisis especially in relation to the economic tools of monetary and fiscal policies that have been found to be effectual to reheat the crisis.
Additionally, soon after the attacks of 9/11, the Fed reduced the interest rates to the level of 1 percent with an aim of supporting the labour market. In the late 1990s and the early 2000s, many developing countries put a large amount of savings into the US banks and other financial institutions (Shomali & Giblin, 2010).
Although other countries were not directly affected by the crisis, they were still significantly affected by the crisis as their economies also crashed, the prices of oil and other commodities skyrocketed, and the banking crisis overwhelmed their 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.
ry Institutions Deregulation and Monetary Control Act of 1980 enabled financial institutions to influence the nature of monetary policies thus making the economy susceptible to non-factual policies, as was the case in 2006.
Thesis Statement: There are several fundamental
The crisis came about due to imprudent and excessive lending by the banks (Chapra, M., 2009). The crisis came about in a chain reaction that started with the mixing of subprime and prime debt and passing the entire risk to the
Though much has changed since then, the fundamental principles of journalism during Cronkite’s time remain relevant. The mobile phone rampantly used today was yet to be introduced that the Universal Press International’s (UPI)
The 2007-2009 Global financial crisis threatened the collapse of some of the greatest financial institutions. The reason the effect was felt by many financial institutions is that they had invested mortgages which lead to deterioration in the balance sheet of the banks as a result of housing bubbles.
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