Factors that Resulted in the Financial Crisis of 2007-2008

This paper outlines the factors that led to the global financial crisis of 2007-2008, including macroeconomic and microeconomic factors. It discusses the impact of cheap credit, speculative activities, declining housing market, loose monetary policy, lack of financial regulation, and more.

Running head: FINANCE
Finance
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Table of Contents
Introduction:...............................................................................................................................2
Discussion:.................................................................................................................................2
Conclusion:................................................................................................................................3
Reference list:.............................................................................................................................4

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Introduction:
The objective of this paper is to outline the factors that resulted in the financial crisis
of 2007-2008. There are various microeconomic and macroeconomic that has contributed to
the occurrence of financial crisis. The global financial system faced the greatest jolt which
out the banking system of the world towards the collapse (wsj.com 2019).
Discussion:
The financial crisis of 2008 has long roots and the affects of such crisis became
apparent to the world. The factor that immediately triggered the crisis was the combination of
availability of cheap credit and speculative activities in the financial market with a particular
focus on the property transactions. The unsustainability of boom was due to the widening of
the gap between income and debt which was due to rising price of energy that led to an
increase in global inflation rate (Imf.org 2019).
The macroeconomic factors that resulted in the occurrence of financial crisis such as
declining housing market and a considerable increase in the current account deficit of US
manifested the global imbalances. In addition to this, a substantial loose monetary policy
which indicated a deviation from the Taylor rule and the decisions concerning monetary
policy of US impacted the rate decisions of European central bank (World Bank.org 2019).
Policy interest rate is one of the macroeconomic factors that triggered the crisis. Over
the period of 2007-2008, the bond yield of the major economies were usually low and the
rates were pushed down because of unusual stronger demand from investors end. One of the
widely regarded causes of the crisis is lack of proper financial regulation which included
complex financial products, regulation of credit agencies, collateralized debt obligations and
risk taking incentives (wsj.com. 2019).

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Excessive liquidity caused by the significant increase in leverage of financial sector,
reserve accumulation and low policy rates. The credit creating capacity of financial system is
limited by the interplay between leverage ratios and regulatory capital. The direction and
effect of international flow of capital also resulted in crisis by putting a downward pressure
on the long run interest rate. In addition to this, the growing demand for mortgages resulted in
the production of risky assets on larger scale which resulted in the co movement of debt and
equality (Bloomberg.com 2019).
Some of the microeconomic factors that contributed to the occurrence of crisis include
financial innovation subprime lending, excessive risk taking, opaque derivative securities,
government deregulation, financial innovation and failed strategies for risk management. The
credit rating of structured investment and the default correlation in the mortgages seems to be
underestimated by such agencies (Ft.com 2019). Furthermore, the reforms for rating practices
could not keep them from being blamed for their own self interest and incompetence.
Conclusion:
The paper has discussed about some of the major findings about the factor that
resulted and triggered the global financial crisis of 2007-2008. It has been found that there are
several microeconomic and macroeconomic factors that triggered the global crisis.
Therefore, it can be concluded that there were a host of macroeconomic and microeconomic
factors that created a cause for financial crisis.

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Reference list:
Bloomberg.com. (2019). Bloomberg - Are you a robot?. [online] Available at:
https://www.bloomberg.com/opinion/articles/2018-07-29/what-economists-still-don-t-get-
about-2008-crisis [Accessed 23 Apr. 2019].
Ft.com. (2019). The worst market crisis in 60 years | Financial Times. [online] Available at:
https://www.ft.com/content/24f73610-c91e-11dc-9807-000077b07658 [Accessed 23 Apr.
2019].
Imf.org. (2019). [online] Available at:
https://www.imf.org/external/pubs/ft/wp/2010/wp10265.pdf [Accessed 23 Apr. 2019].
World Bank. (2019). New Study Reviews the World Bank Group’s Response to The Global
Financial Crisis. [online] Available at:
http://www.worldbank.org/en/news/press-release/2010/11/18/new-study-reviews-the-world-
bank-groups-response-to-the-global-financial-crisis [Accessed 23 Apr. 2019].
WSJ. (2019). The 2008 Financial Crisis: How It All Began. [online] Available at:
https://www.wsj.com/articles/the-2008-financial-crisis-how-it-all-began-1502997466
[Accessed 23 Apr. 2019].