When the financial system or the economy as a whole undergoes a rapid and large decline, it is said to be in a financial crisis. Financial assets like
When the financial system or the economy as a whole undergoes a rapid and large decline, it is said to be in a financial crisis. Financial assets like stocks, bonds, and real estate often see a sharp and significant decline in value during financial crises. They can also be identified by a decline in credit availability and a loss of faith in financial institutions like banks.
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Financial crises can be caused by a variety of factors, including:
- Overleveraging: When people, businesses, and governments take on excessive debt, they put themselves at risk of a financial collapse.
- Asset price bubbles: When the cost of an asset, such as a home or stock, rises quickly, it can lead to a financial crisis when the price falls sharply.
- Bank runs: When enough customers attempt to withdraw money from a bank at once, the institution may become insolvent and shut down, triggering a financial crisis.
- Financial institution mismanagement: Financial institutions that are poorly managed may become bankrupt or fail, which could trigger a financial catastrophe.
- Economic recessions: A financial crisis can result from an economic recession, which is defined by diminishing economic activity and growing unemployment.
This article will discuss the global financial crisis (GFC) of 2007-08, its main causes, and how the financial crisis impacted the economy.
What is a global financial crisis
The global financial crisis of 2007–2008 was a major financial crisis that had far-reaching impacts on the global economy. A housing market bubble, unethical subprime mortgage lending practices, and the overproduction of sophisticated financial products like mortgage-backed securities all contributed to its cause.
The subprime mortgage market in the United States, specifically, served as the catalyst for the 2007–2008 global financial crisis. Loans with risky lending terms and high interest rates were given to borrowers with bad credit records under the phrase “subprime mortgages.” A housing market bubble in the US was brought on by the rise in subprime mortgage loans and the subsequent marketing of these loans as securities.
Many borrowers were unable to make mortgage loan payments when the housing bubble eventually burst and prices started to plummet, which sparked a wave of foreclosures. The value of mortgage-backed securities decreased as a result, and the global financial system experienced a liquidity crisis, which set off the GFC of 2007–2008.
Due to the crisis, home prices significantly dropped, there were a lot of foreclosures, and the credit markets were frozen. This in turn sparked a financial crisis that required government intervention and bailouts, as well as a global recession. The crisis’ effects were felt on a global scale, causing widespread economic distress as well as a fall in employment and economic growth.
What are the main causes of the global financial crisis
The financial crisis spread quickly over the world as a result of the financial markets’ globalization and the links between financial institutions and nations. The following are the primary reasons for the global financial crisis of 2007–2008:
- Subprime mortgage lending practices: Banks and other financial institutions made riskier loans, referred to as subprime mortgages, to consumers with bad credit. These loans were frequently packaged and offered for sale as securities, which inflated the housing market.
- Lack of regulation: The absence of regulations in the financial sector led to the emergence of complicated financial products that were challenging to evaluate and comprehend, such as mortgage-backed securities, credit default swaps, and risky lending practices.
- Housing market bubble: In the US, a housing market bubble was brought about by subprime mortgage lending combined with the marketing of these debts as securities. Housing values decreased as the bubble eventually burst, and many borrowers found themselves unable to make mortgage loan payments.
- Credit market freeze: Credit markets became frozen as a result of the decrease in the value of mortgage-backed assets, making it impossible for financial institutions to acquire capital and resulting in a liquidity crisis.
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What are the consequences of the global financial crisis
The consequences of the global financial crisis of 2007–08 were far-reaching and long-lasting. Some of the most significant impact of global financial crisis on world economy include:
- Economic Global recession brought forth by the crisis was defined by a sharp decline in economic activity, dropping output, and rising unemployment.
- Several sizable financial institutions failed as a result of the banking crisis, which necessitated government intervention in the form of bailouts and recapitalizations.
- Housing price decline: The US housing price slump that caused a large drop in household wealth and a wave of widespread…
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