Causes and Impact of the Global Financial Crisis

Running head: GLOBAL FINANCIAL CRISIS
Global financial crisis
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1GLOBAL FINANCIAL CRISIS
Introduction
In the current global scenario, one of the major phenomenon emerged in the financial
crisis. In the last century, the major global financial crisis emerged in 1929 and this phenomenon
again got focus only in 2008 when the global financial crisis emerged in the United States and
expanded that across the world. However, the impact of the 2008 global financial crisis is much
and its impacts are still prevailing in different sectors and countries (Serriccohio, Tsakatika and
Quaglia 2013). The entire financial system along with the national economy of the United States
is badly affected causing loss of millions of jobs and other impacts. The major reason behind the
huge impact of the 2008 global financial crisis is due to the reason of the globalization. This is
due to the fact that globalization caused dependency of the countries on each other and
emergence of the financial crisis in the United States covered the other countries as well
(Benetrix, Lane and Shambaugh 2015).
This essay will discuss about the major possible causes of the global financial crisis and
the probability of its future emergence. In addition, this essay will also discuss about the impact
of the global financial crisis of the economies of different countries. The effectiveness of the
current reforms being initiated will be evaluated and accordingly a few recommended steps will
be discussed.
Causes of the global financial crisis
One of the major reasons for the emergence of the global financial crisis is the
ineffectiveness of the banking sector in providing loans in the United States. This is due to the
reason that according to the reports, the added money created by the banks compared to the
actual cash available (Cukierman 2013). It is reported that from the late nineties, American banks

2GLOBAL FINANCIAL CRISIS
have created new money by approving new loans without availability of the actual cash. Thus, it
led to the increase in the debt in the economy. With the increase in the debt, major section of the
population lists their average purchasing power, which leads to the emergence of the recession.
Figure: 1
Providence of loans by banks
Source: (positivemoney.org 2019)
According to the above figure, it is identified that loan amount approved by the banks in
the United Kingdom is much more than the actual cash identified in green. Thus, it can be
concluded that when the economy is having cash flow of only £ 67 billion, the loan amount
swelled to more than £ 2000 billion. This led to the ballooning of the entire financial condition of
the country.

3GLOBAL FINANCIAL CRISIS
It is also reported that majority of the approved loans are being invested for enhancement
of the assets such as residential property and real estate rather than in further business
investment. This caused increase in assets and less business investments. Thus, the new
opportunities got less emerged compared to the increase in the assets. Moreover, a major chunk
of the money got invested for personal loans and credits, which lead to the expenditure beyond
the available cash in the economy (Coulibaly, Sapriza and Zlate 2013). In the later stage, the
major section of the population were not having enough cash for further expenditure and the
banks were also not being able to recover the debt from the market. This caused recession in the
market. It is also identified that in the further stage of the recession of the economy, banks also
declined for further loan approval, which caused less amount of capital with the people. The
available fund with the population went in to the repayment of the loans, which caused less
available fund for other expenditure (Bengtsson 2013). The market demand got reduced along
with the reduction in the business opportunities.
With the present era of globalization relevant in the current business scenario, majority of
the countries are depended on each other’s economy. Moreover, American economy was being
considered as one of the largest economy. Thus, with the economic downturns on the American
financial system, economy of the countries depended got badly affected, which lead to the
worldwide impact of the financial crisis (Rey 2015). Thus, it can be concluded that the above
stated factors are the major reasons for the emergence of the 2008 global financial crisis.
Probability of further emergence of the crisis
According to the different reports, emergence of the further financial crisis is having high
probability. According to the International Monetary Fund, the major portion of the growth of