The Global Financial Crisis
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Added on 2020-10-22
The Global Financial Crisis
Added on 2020-10-22
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GLOBALFINANCIALCRISIS
INTRODUCTIONThe Global financial crisis mention to the time period of extreme stress in globalfinancial markets. It is related to banking systems that happen mid 2007 and early 2009. Themain cause of GFC was acute recession prevailing an US housing market, this recession thanspread out globally through international financial system. This resulted in bankruptcy and lossof trust in government. This was the biggest recession experienced all over the world after thegreat depression of 1929. Loss of jobs by individuals and laggard recovery of financial systemsglobally were main after effects that countries like US, UK and Europe experienced. All thefinancial crisis relative to important factors that explain to GFC in broad way. (Karanikolos, andet. Al, 2013)Sub- prime mortgage is a type of loan granted to an individual. It is issued toborrowers with low credit ratingand having FICO score less than 640 and having difficulties tomeet prescribed standard these loans for that persons. Prime mortgage loan offers to those havinggood credit score and having dependability history. Sub-prime borrowers are highly risky forlenders and they have to pay high interest rate in comparison to prime mortgage borrowers. Mostof the people will not be able to get prime mortgage loan because of the credit criteria.. Ithappens because of the Federal Reserve's Decision, those people not eligible for loan theysuddenly approved for sub-prime mortgage loan. In 2008, whole world suffers from financialcrisis and it is rooted from American financial market. Sub-prime mortgage financial crisishaving huge impact on American economy and which is expanded in whole world. It destroyedcountry's economy, financial market and individual life too. For example: - Lehman Brothers,AIG, Fannie Mae and Freddie Mac. That crisis not only effect the America but also having hugeimpact on other countries. Lehman Brothers are the owner of largest investment bank which isfully destroyed in sub-prime mortgage crisis. It is a first bank which involved with investing inmortgage. Effect of this mortgage crisis is very deep and housing market is completely damage,rate of interest on mortgage is rapidly increased. Because of high interest rate borrowers are notable to pay it's monthly instalment and unable to sell its home which is purchased by mortgageloan . Even those people also having struggle, who qualified for standard mortgage loan withgood credit score. Banks were having huge losses on real state and investors also losses all theinvestment which is invested in mortgage. It became worst case, when people still getting sub-prime mortgage loan , and the bubbles is going to burst in 2006 and early 2007. Some institutes1
got government help but other banks who involved in this business at high level were not solucky. Banks werefully destroyed because of the sub-prime mortgage crisis.In today's market,sub-prime mortgage loans was disappeared after American 2008 crisis.It is a biggest past offinancial crisis in the world who change the corporate image in mortgage loan sector. It startselling non-prime loans to borrowers who struggled with credit scores. There is also availableother forms of loans which is different from sub-prime mortgage loan and few economist havingconcern regarding the debt, it is similar to the sub-prime mortgages. For example:- in 2017,according to Citi bank report student loan debt is growing as similar to the sub-prime mortgageloan, which can create financial crisis in the future.Yes, it can repeat if the existing policies was not good for the economy, that's whypolicies play a major role in the economy. Bank have to work according to these policies and if itis not follow in a proper way than it moves towards financial crisis. Political disputes andinstability is can also create financial crisis, if country's government is not stable then policiesalso change time by time (Erkens, Hung, and Matos, 2012). There is high chances of financialcrisis because of the unstable government. For example: - Student loan, it is type of loan whichprovide them for the purpose of higher education. Student will pay their educational expensesfrom loan amount and paid after the completion of education. They can apply for loan, and thereis no requirement of any securities, it means student get loan without securities. According toreport, no of defaulter is increased in student loan, but there is no law regarding studentbankruptcy, so student have to pay it's own loan amount. After that incident, bank will loose thetrust from people and it also effect on economy. If number of defaulter is increases than interestrate of loans will be increased by bank to reduce the power of consumer to take loans. It will helpto economy to control the flow of cash, through increase the rate of interest and try to balancecountries liquidity. It is better to make proper strategies and policies and follow in a proper way,and also try to change policies if it is not suitable. Make flexible strategies which is suitable forall because in will effect the economy. Their is no specific mantra to control or stop the financialcrisis, learn from past incident like sub-mortgage loan crisis and from other crisis (Sparrow,Farndale, and Scullion, 2013). The causes of financial crisis happened when banks were able to create too muchmoney, too quickly and used it to push up house prices and speculate on financial markets. (1)Bank created too much money – There is one basic reason of financial crisis is excess leverage in2
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