Global Financial Crisis (GFC) and Its Impact

Running head: ECONOMICS OF GLOBALISATION
ECONOMICS OF GLOBALISATION
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1ECONOMICS OF GLOBALISATION
Table of Contents
Introduction......................................................................................................................................2
Causes of Global financial crisis.....................................................................................................3
Impact of global financial crisis in the UK economy......................................................................4
Impact on UK’s rate of unemployment...........................................................................................4
Impact on housing prices in UK......................................................................................................6
Impact on UK’s imports as well as exports.....................................................................................8
Impact on UK banks causing bankruptcy........................................................................................8
Impact on the exchange rate............................................................................................................9
Evaluation of economic concepts....................................................................................................9
Economic policies implemented by the UK government in response to this global financial crisis
.......................................................................................................................................................10
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

2ECONOMICS OF GLOBALISATION
Introduction
The purpose of this report is to explain about the impact of global financial crisis (GFC)
in the UK economy that started in US during the period 2007 and 2008. The GFC that began in
2007 with the crisis occurred in the market of subprime mortgage in the US, which then
developed into international banking crisis. In fact, the investment bank named as Lehman
Brothers collapsed during this period. Huge risk-taking by the US banks including Lehman
Brothers facilitated in magnifying financial impact globally. At the epicenter of GFC, there was
huge tensions around the globe, the Federal Reserve in US brokered deal that permitted JP
Morgan in acquiring Bear Stearns (Berkmen et al. 2012). In addition, the Lehman Brothers that
has been filed for the bankruptcy security also followed by radical losses in their stocks as well
as assets devaluation. Palliative monetary as well as fiscal policies had been implemented in
order to prevent collapse of global financial system. This financial crisis led to downturn in the
economy not only in the US but also in other nations worldwide. The effect of the GFC on the
UK economy was larger than few other nations because of some particular factors. This financial
crisis hugely affected on the housing market of UK. The prices of the houses have increased at
high rate during the year 2008. Therefore, with rising trend in the values of property since
deregulation, the markets of mortgage became highly profitable as well as attractive to all the
banks in the global world. As a result, UK experienced decrease in manufacturing activities and
rise in rate of unemployment in the labor market. Even the global export of products and services
of UK declined at high rate (Cowling, Liu and Ledger 2012). Moreover, this GFC adversely
affected in this nations trade and thereby the government of UK protected local industries that
issued protection policies in reducing imports. This also led to decrease in imports of UK during
this period.

3ECONOMICS OF GLOBALISATION
Causes of Global financial crisis
The main causes of this GFC were due to credit crunch as well as housing bubble. The
primary cause of the GFC during the period 2007 -2008 was due to deregulation in financial
sector. This allowed the banks in engaging in trading hedge fund with derivatives. However, the
banks then demanded large mortgages for supporting sales of the derivatives. They even created
interest on loans and this benefitted the subprime borrowers as it became affordable to them. The
main causes of GFC during the period 2007-2008 are illustrated below:
Credit crunch
The GFC has commonly believed to have started in 2007 with the crunch in credit when the
confidence loss of the investors in US in sub-prime mortgages value resulted in liquidity crisis.
This led the federal bank in US to invest huge amount of funds into the financial markets. As a
result, the crisis worsened owing to high volatility of stock markets in the globe (Chor and
Manova 2012). The crunch in credit defines as the sudden funds shortage for lending, which
leads to decrease in availability of loans. Credit crunch occured due to several reasons, which
includes-
 Sudden rise in rate of interest
 Direct control of money by the respective economy’s government
 Scarcity of funds in capital market
The housing bubble and subprime crisis
In US, the housing market suffered largely because several homeowners had pulled out
their subprime mortgage loans as they had less ability in meeting their mortgage reimbursement.
This was triggered by decrease in the prices of houses after crumpling of housing bubble. This