How has the global financial crisis affected the international economy - Coursework Example

The main cause of this subprime crisis was the securitization in which the banks converted their loans into sellable assets with the intention of putting risky loans on others’ shoulders. For this, banks started borrowing more money to be given out as loans in the form of securities, which meant more securitization. Lehman Brothers, which collapsed on September 2008, is an example of such investment banks which got into mortgages by buying those securities and selling them on. When there was no one left to be given out loan to, banks decided to loan to the poor which was the riskier business.

But they thought it was not that risky as bad loans would lead to the possession oh high priced property owned by the people. Thus, without proper management, bank got involved into a risky trading business of buying and selling loans. So when they wanted their money back, the riskier loans made them collapse. The banks asked the government for compensation which gave them new capital, but the confidence was lost (Shiller 2008). According to Professor Joseph Stiglitz (2010), the economist and the Nobel Prize Winner in economics, the US financial market was in a weak economic bubble before the crisis occurred.

Most of the financial growth depended on the real estate. Housing was becoming expensive but the income was decreasing, which led to the fact that most of the growth was sustained by a few top people which meant that “we were consuming beyond our means”, states Stiglitz. He points out an important issue that when the governments put in more liquidity in the markets and banks to save them, the latter started thinking that they were saving themselves. As mentioned above, when the banks started running out due to bad loans, governments bailed them out using complex financial derivatives, like Credit Default Swaps (CDS) and Collateral Debt Obligations (CDO), which strengthened their habit of bad