Economics for Manager Assignment
10 Pages2231 Words452 Views
Added on 2019-11-20
Economics for Manager Assignment
Added on 2019-11-20
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ECONOMICS FORMANAGERStudent id
IntroductionThe financial crisis that began with the bursting of US housing market lasted from December 2007 to June 2009 affecting many countries around the globe. It was the deepest economic downturn called “The Great Recession”. This was considered to be largest after the great depression caused by the sharp decline in economy. This phenomenon began after the U.S housing bubble resulting the mortgage backed securities and derivatives value was drasticallylost. This was the longest recession after the world war II causing the destruction of nearly $20 trillion worth of financial assets owned by U.S. households. Due to such massive loss, there were major cutbacks in the spending of consumers that causes chaos in the financial market initiated by the bursting of the bubble which lead to declination of business investment. This crisis spread around the world as consumption and investment decreases in US leading to reduction in exports from other countries. As a result, GDP was reduced by 2%in 2009.The US unemployment rate also increased from 4.7% to 10% which was a severe jobloss. Due to job loss family incomes dropped and poverty raised.Causes of the Great recessionsIt is apparent that during this period the U.S government faced many challenges, the banks lost their wealth and were about to get bankrupt, public debt increased greatly, stock market crashed, people lost their jobs and there were instances when highly qualified professionals had to join underqualified jobs, the dollars rate fell, etc All these led to global financial crisis.The main causes of this recessions are discussed in brief:
Housing Bubble:There was the boom in prices in housing due to the increasing demands, speculation and ebullience. This what gave rise to housing bubble which happens when the supply is limited. After the dotcom bubble, along with 2000 stock market crash there was this shift of dollars from the stock market to real state. Additionally, getting loans were relatively easier to neutralize the economic recession. The central banks along with other banks favoured the housing market for creating more wealth and giving a secured asset that people could borrow money to support the economy. There were loans of different nature such as interest only loans, zero down loans and interest adjustable loans all to make loans easily available to public. It is said that 56 percent of housing purchases in this period were made by the people who could not afford to buy in normal lending conditions. Fake subprime burrowers and people were changing homes to take advantage of the situation. With every single loan bank would readily securitize the loans and the move on the risk to other parties. Even the rating agencies would put AAA rating on these loans to attract the foreign investors. As a result, the amount of derivatives held by the financial institutions crashed and the total amount cash became lesser and lesser. In the period of 2003 to 2007 there was humongous increase in subprime loans to 292 %, 332 billion to 1.3 trillion (DeGrace, 2011).Great Moderation:During the span 2000 to 2007, the economy was stable, inflation rates were low and there were less number of unemployed people. The Federal bank were successful in maintain the low inflation rates which ensured stable economy. But there was growing instability in credit and financial markets.
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