Economics for Manager Assignment

Added on - 20 Nov 2019

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IntroductionThe financial crisis that began with the bursting of US housing market lasted from December2007 to June 2009 affecting many countries around the globe. It was the deepest economicdownturn called “The Great Recession”. This was considered to be largest after the greatdepression caused by the sharp decline in economy. This phenomenon began after the U.Shousing 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 financialmarket initiated by the bursting of the bubble which lead to declination of businessinvestment. This crisis spread around the world as consumption and investment decreases inUS 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 bankslost their wealth and were about to get bankrupt, public debt increased greatly, stock marketcrashed, people lost their jobs and there were instances when highly qualified professionalshad 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 andebullience. 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 dollarsfrom the stock market to real state. Additionally, getting loans were relatively easier toneutralize the economic recession. The central banks along with other banks favoured thehousing market for creating more wealth and giving a secured asset that people could borrowmoney to support the economy. There were loans of different nature such as interest onlyloans, zero down loans and interest adjustable loans all to make loans easily available topublic.It is said that 56 percent of housing purchases in this period were made by the people whocould not afford to buy in normal lending conditions. Fake subprime burrowers and peoplewere changing homes to take advantage of the situation. With every single loan bank wouldreadily securitize the loans and the move on the risk to other parties. Even the rating agencieswould put AAA rating on these loans to attract the foreign investors. As a result, the amountof derivatives held by the financial institutions crashed and the total amount cash becamelesser and lesser. In the period of 2003 to 2007 there was humongous increase in subprimeloans 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 therewere less number of unemployed people. The Federal bank were successful in maintain thelow inflation rates which ensured stable economy. But there was growinginstability in creditand financial markets.
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