Global Financial Crisis: Causes, Impact, and Reforms

Global Financial Crisis
1 / 1 8 / 2 0 1 9

Global Financial Crisis 1
Discuss the possible causes of the financial crisis. Do you think GFC could be repeated
again? Discuss.
Explain the scale and impact of GFC in economies of different countries including your
own country. Identify some of the actual or proposed reforms which have eventuated.
Global Financial Crisis (GFC)
Global Financial Crisis (GFC) is considered the most significant worldwide economic
catastrophe since the Great Depression of 1929. The sub-prime mortgage crisis is an example of
the financial crisis that created an impact on the global financial markets across the world. The
aim of the paper is to discuss the possible causes that lead to the financial crises and the
examples crises. Further, it includes the opinion related to the aspect that GFC can be repeated
again (Dias, Rodrigues and Craig, 2016). The scale and impact of the GFC in economies of the
various countries include home country is discussed with the identification of the actual and
proposed reforms which have eventuated.
The global financial crisis (GFC) is referred to as the period of the extreme stress in the markets
of the global financial and banking system in between 2007 and early 2009. This has been found
that During GFC, a recession in the US housing was a catalyst for a financial crisis that spread to
rest of the world with the common linkage in the global financial system (Bénétrix, Lane, and
Shambaugh, 2015). During the period, numerous banks across the work faced losses and relied
on the support from the government to prevent the bankruptcy. Millions of people lost their jobs
as it was considered as the major advanced economies that experienced their deepest recession
since the year the 1930s when there was Great Depression.

Global Financial Crisis 2
Possible causes of the financial crisis
The financial crises took place due to the different reasons and some of the possible causes that
lead to the financial crisis are discussed below:-
Deregulation
The financial crisis was majorly caused by deregulations in the industry of finance in which they
permit the banks to get engage in the hedge find trading with derivatives. This made the banks to
demand the more mortgages to provide the support to the profitable sale of these derivatives.
Further, the banks created the interest-only loans that become affordable for the subprime
borrowers. In the year 2004, the Federal Reserve raised fed funds rate similar to the way they
just resent the new mortgages interest rates (Amadeo, 2018). This results in the falls in the
housing prices because the supply of the product outpaced the demand. Moreover, the values of
the derivate crumble that makes the banks to stop lending the money to each other. This leads to
the financial crises that led the Great Recession.
Rise in borrowing by banks and investors
The rise in the borrowing by the banks and investors is one of the causes which led to the global
financial crisis. The banks and other investors in the market of US and aboard borrowed huge
amounts with the motive to expand their lending and to make the purchase of MBS products.
This shows that there was a rise in the leverage which magnifies the potential profit and losses.
As a result, this was found that prices of houses in which investors made the investment started
falling due to which banks stated facing losses because they had borrowed a large amount
(Reserve Bank of Australia, 2018).