Reasons Behind Global Financial Crisis of 2007

The assignment explores the causes of the 2007 global financial crisis, with a focus on the debate surrounding the shift from stakeholder to shareholder finance. It discusses alternative views on the primary reason behind the crisis, including international savings gluts and national macroeconomic imbalance. The document also examines the impact of neo-liberal economic policies in the USA and the creation of a virtual economy, which contributed to the fragility in the financial services sector.

Hi Vangelis,
Certain debates have confronted to find out the reasons behind the global financial
crisis of 2007 that started initially in USA and afterwards, it went on to hit the global
economy as well. According to Ferri and Leogrande (2015), the shift from stakeholder to
shareholder has been the primary reason behind the crisis. The stability in the financial
system was imbalanced due to modification into greater systemic risk because of the shift
from STV-OTH to SHV-OTD. I think that this might be a secondary reason behind the crisis;
however, there is much more to the entire story.
In the words of Balakrishnan, Watts and Zuo (2016), the primary reason behind the
crisis is due to the international savings gluts repressing long-term rates of interest and
increasing asset prices. Along with this, another cause is national macroeconomic imbalance.
Even though a small variation could be observed, both need the reform of global financial
structure for resolving the issue.
Thus, the significant reason is the long-term imbalance leading to the crisis. In the
mean time, USA supported the neo-liberal economic policy leading to the creation of virtual
economy (Vazquez and Federico 2015). Moreover, USD controlled the international
monetary system and its influence was extended into the world economy. The virtual
economy includes insurance, financial services, leasing services and real estate sectors.
Between 2007 and 2009, there was heavy decline in the GDP of USA resulting in increase in
the virtual economy and fragility in the financial services sector. Based on this viewpoint, the
shift from STV-OTH to SHV-OTD is not the major reason behind the global financial crisis.
Regards,
Khaled

References:
Balakrishnan, K., Watts, R. and Zuo, L., 2016. The effect of accounting conservatism on
corporate investment during the global financial crisis. Journal of Business Finance &
Accounting, 43(5-6), pp.513-542.
Ferri, G. and Leogrande, A., 2015. Was the crisis due to a shift from stakeholder to
shareholder finance? Surveying the debate.
Vazquez, F. and Federico, P., 2015. Bank funding structures and risk: Evidence from the
global financial crisis. Journal of banking & finance, 61, pp.1-14.