Macroeconomics Term Paper - Essay Example

The financial crisis will shed its impacts around the globe due to globalization. The livelihood of all people at every corner felt the heat of crisis (World Bank, 2009). One of the prime causes for the financial crisis to take place is collapse of the real estate market of United States, also characterized as the housing bubble. The collapse resulted in surge of mortgage loan defaults. The collapse of the real estate market and the subprime mortgage market of the U.S. had the severe effects around the globe.

Uncertainties crept in the financial markets. The creditors reacted to the situation by pulling out funds as well as cashed out the securities that were issued by the concerned financial institutions. The situation became so severe that some financial institutions failed to survive while others just managed it. The loan and credit possibilities from the bank dried up. The investors began to dump their investments and therefore downturn in the share market was the inevitable outcome. The system suffered from the loss in confidence.

The banks took the policy to borrow with the view to create securitization. As long as the banks can pull out money by selling loans on the basis of securities, they did not feel the dependency to rely on the savers. Some banks directed themselves into mortgages. The government pressurized the banks to offer loans to the poor and these loans involved the risks of getting defaulted. The banks were used to purchase the mortgages with the aim to securitize them and then sell them off. The exposure of the banks towards risks gained probability.

The lending process slowed down with the realization of the problem. Some of the banks were on the verge of the most risky loans which was beyond the intention of the investors. The lenders wished to take back the loans. The investment banks could not make much progress as they had little deposits to deal with. The situation