Financial Crisis of 2008: Causes and Effects

The global financial crisis of 2008 was the greatest economic disaster after the Great Depression. It originated from the sub-prime mortgage market of the United States and quickly spread globally. The heavy deregulation of financial markets and the proliferation of financial products linked to risky mortgage loans were major causes of the crisis. Asymmetric information dissemination in the financial markets led to the collapse of asset-backed securities markets and delayed trading equilibrium. The crisis had severe effects on the global economy, including a decline in stock markets, frozen dollar funding markets, and slowed economic activities.

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Financial Crisis, 2008

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Global Financial Crisis:
In the year 2008, the global economy had to encounter a severe economic disaster in the form
of financial crisis. The economic crisis was the greatest event in the entire history of the
world after the occurrence of great depression in year 1930. The said crisis began to spread
its roots in 2007 after originating from sub-prime mortgage market of United States. Soon
after its origination in U.S. market, the liquidity crisis quickly reached the global level with
its devastating economic outcomes. During those years of global financial crisis, the stock
markets of several developed nations across the world were facing the huge down fall in the
values of stock traded over there; the dollar funding markets were critically highly frozen.
Also, there was a sheer decline in the consumer lending functions of financial markets and
the major economic activities of different nations slowed down significantly (Reinhart &
Rogoff, 2008)
Role of asymmetric information in the financial crisis:
The major cause of the great global financial crisis was the heavy deregulation of the
financial markets and this was led by the proliferation of the financial products that were
linked to the mortgage loans of risky nature. The financial imbalances in the activities of
banks and other financial institutions made the major economies of the world intensely
illiquid. The US mortgage dealers lent the huge sums of funds to the borrowers with quite
unfavourable terms. The flow of asymmetric information in the financial markets has resulted
in shutting down of the asset-backed securities markets which were the key contributors of
the global economic crisis. The ABS markets were featured by the asymmetric information
dissemination regarding the true picture of financial situation of the borrower (seller of
mortgage securities). It caused generation of generation of fire-sale pricing approaches and

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delay in the trading equilibrium of the financial markets ((Dell'Ariccia, Detragiache & Rajan,
2008). The asymmetric financial information about the borrowers made the banks and
financial institutions lend them money reluctantly. The another factor that contributed to the
collapse of various ABS market segments at time of financial crisis the flow of asymmetric
financial information between the buying and selling side of the structured financial products
that were highly risky in nature.

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References:
Dell'Ariccia, G., Detragiache, E., & Rajan, R. (2008). The real effect of banking
crises. Journal of Financial Intermediation, 17(1), 89-112.
Reinhart, C. M., & Rogoff, K. S. (2008). Is the 2007 US sub-prime financial crisis so
different? An international historical comparison. American Economic Review, 98(2),
339-44.

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