Global Financial Crisis: Causes, Effects and Lessons

INTRODUCTION
GFC and Global Financial Crisis refer to a situation of extreme depression in overall financial market. The
year 2007-2008 was known to be the year of worldwide crisis and is considered to be the worst financial
crisis by many economist since the depression which occurred in the year 1930’s.The main reason
behind the global financial crisis was the crash in the US housing market that spread like a fire from the
United States to rest all over the world. Banking sector all over the world incurred huge losses and
depends on the country government support in order to avoid indebtness.Many lost the jobs in this
severe recession and the recovery from this recession was very slow as compared to past recession.
(Reserve Bank of Australia, 2019)
POSSIBLE CAUSES OF FINANCIAL CRISIS
It is very difficult to analyze the main possible causes of the financial crisis. However, the experts and
analyst believed that combination of several factors have lead to the explosion in the market of US and
afterwards to the rest of the world. Few main causes, which can be described below for the contribution
of financial crisis, are as follows:
 World Trade Imbalance: After joining the World Trade Organization in 2001 by china, it has
benefitted a lot. China has fully utilized the advantage of the global market. China spread its
product worldwide with very cheap prices and has flooded the world with very cheap exports.
The exchange rate of Chinese currency Yuan was also kept very low so to make the trade very
competitive and able to attract all the country worldwide. This also helped china to accumulate
huge foreign earning and to do trading in vast scale and increase its trade surplus while rest of
the countries in the world expecially the United States ,trade deficit was increased. For instance
the trade deficit of the country US has tripled from the year 1999 to year 2007.Gradually the
production of the consumer goods has also declined sharply in the United States and gradually
US economy shifted to a service economy. (ResearchGate, 2019)
 United States Consumption Pattern: The economy of United States did not adjust itself
regarding the trade deficit and trade imbalance. Due to high imports and less export to another
country lead to trade imbalance. All deficits in trade balance were mainly outsourced from
external borrowings. The external borrowing was mainly from china, the surplus received from
the United States was reinvested in buying the Treasury bill and bonds of US. This continuous
process of trade deficit worsened the economy and the trade deficit can be witness in the public
budget as well. (ResearchGate, 2019)
 Financial Markets Deregulation: The liberalization in financial market since 1980 as the market
was completely deregulated and the monitoring of market by government and FED was

completely relaxed. This also allowed the United States to expand its role in providing financial
services and become a major player in providing the services. As a result, US introduced many
derivatives and products .And as a result involvement of many investment bankers and market
mortgagers is an example of deregulation .All the liberalization and deregulation created a
situation that lead to the burst in the credit market. (ResearchGate, 2019)
 Increases borrowing by banks and investors: The bankers and other investors started
borrowing from outside in huge scale in order to increase their purchasing power and expand
their lending operations. Borrowing money in order to finance the asset increases the profit at
the same time leads to losses too. When the house prices started declining, banks and investors
was the first who had incurred huge losses because of their huge borrowing from outside
market. (Reserve Bank of Australia, 2019)
Sometimes banks and other borrows used to borrow money for a very short span of time like
just for an overnight in order to purchase an asset and which cannot be quickly sold
off .Accordingly the bankers became dependent on other bank and lenders in order to finance
their new short term loan as existing loan were not repaid.
Will it happen Again?
The Global Financial Crisis worldwide taught huge lessons to the investors, some of which can be
highlighted as well:
 The investment and economic cycle is alive and very well.
 More the risk, more the return.
 True diversification importance.
 Importance of Asset allocation.
 Too much gearing should be avoided, and any wrong gearing also should be avoided.
 Return to normal parameter after financial crisis can take huge time.
 Monetary and fiscal policy generally works.
No one can judge and state whether there will be global financial crisis in future or not but of course,
the recession and crisis specifics will be different which might occur next time. (Oliver, 2017)