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Global Financial Crisis Assignment

   

Added on  2020-04-15

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Running head: ASSIGNMENT OF GLOBAL FINANCIAL CRISISAssignment of Global Financial CrisisName of the StudentName of the UniversityAuthor Note

1ASSIGNMENT OF GLOBAL FINANCIAL CRISISContents1. Answer...................................................................................................................................22. Answer...................................................................................................................................36. Answer...................................................................................................................................5Reference:..................................................................................................................................9

2ASSIGNMENT OF GLOBAL FINANCIAL CRISIS1. AnswerThe global financial crisis is believed to start in July, 2007 with credit crunch. Theloss of confidence by the US investors led to the liquidity crisis. For this reason, US FederalBank injected a huge amount of capital into the financial market. However, in 2008, thesituation got much worse as the stock market crashed around the world. What follows in turn,has been discussed in the following section.Sub-Prime Crisis:According to the critics, the main reason for the global financial crisis is due to the fact thatborrowers were not being able to repay the mortgage loan (Hass and Lelyveld 2014).Housing market in the US had suffered largely as most of the home owners who had takentheir mortgage loan were unable to repay. As the large number of borrowers defaulted onloan, it was quite difficult for the bank to obtain those loans from them. As housing collapse,this situation acted as a trigger for global financial crisis. Moreover, another main reason forglobal financial crisis is because of three rating agencies Standard & Poor's, Fitch, andMoody's failed to organize subprime security as investment grade. This would further triggerthe crisis as those famous rating agencies were paid to rate securities (Hass and Lelyveld2014). Thirdly, due to the higher food and petrol prices in the summer of 2008, it led to thecrisis of market led growth which in turn led to the global financial crisis. Therefore, in total,2008 global financial crisis occurred due to the convergence of different forces along withsocial, economical and political (Vazquez and Federico 2015).Financial crisis spread like epidemics. Several countries were affected due to the USfinancial crisis. Foreign banks bought collateralized debt. Many of these loans wererebundled and sold to the various financial institutions across the world (Vazquez andFederico 2015). Moreover, all the international banking systems are internally linked. If some

3ASSIGNMENT OF GLOBAL FINANCIAL CRISISbank started losing money, it has the impact in their international banking system. Therefore,it was difficult for firms and consumers to borrow from the banks. This reduction in lendingled to the further decrease in aggregate demand (Claessens and Van Horen 2015). Therefore,those countries do not have any exposure to subprime lending also affected by this creditcrunch. On the other hand, during this recession, global export fell. Countries experienced adrastic reduction in exports. This would spread to the global recession. Further, this financialcrisis, negatively affected the consumer led to the lower financial growth (Hass and Lelyveld2014). The US Federal Reserve and then Bush administrator could have been prevented theglobal recession if they considered the early warning signs. In the late 2006, for the first time,the commerce department revealed that housing rate dropped by 28% in that year (Milner,Niven and LaMontagne 2015). However, the US government were unable to predict that thefurther slump of home sale in the coming few months as it did not happen since greatdepression. In fact, as per the Beige report, the Fed claimed that their economy is strongenough to combat with the price slump (Milner, Niven and LaMontagne 2015). In that year,for the second time Fed government ignored the warning (Claessens and Van Horen 2015).This time it was the inverted yield curve for US treasury notes. Inverted yield treasury notesrefer when short-term treasury notes are higher than the long term treasury notes. Normally,the yield curve was inverted shaped before the past recessions of 2001, 1991 and1981(Milner, Niven and LaMontagne 2015). Critics ignored this sign as interest rates werecomparatively lower than in the prior recessions. They assumed that housing price wouldagain increase as Fed cut down the interest rate. However, this was not the case.

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