Economic Analysis: Major Sources of the Global Financial Crisis 2008

This essay examines the primary causes of the 2008 global financial crisis, attributing it to a combination of speculative transactions focused on property and global financial integration coupled with inefficient monetary policy in the United States. The housing bubble, fueled by low-interest rates and stock market investments, led to unsustainable price increases and an eventual burst in 2007. Simultaneously, increased financial globalization exposed investments to vulnerabilities, amplifying the crisis's impact across numerous countries. Inadequate policies, such as maintaining low short-term interest rates, further incentivized risky lending practices by banks, contributing to the rise in mortgage demand and housing prices. The essay concludes that the interdependence of investments and the need for efficient financial regulations are crucial for preventing future economic instabilities, highlighting the significant influence of financial globalization on worldwide economies. Desklib provides resources for students, including solved assignments and past papers.

Economics
Financial Crisis

ECONOMICS 1
Introduction
The dual amalgamation of the complex financial systems and processes; and the lack
of adequate political measures contributed towards the global financial crisis of the year
2008. The said financial crisis of the 2008 and the resulting aftermaths are together regarded
as one of the biggest and strident downfalls in the economic events (International Monetary
Fund, 2010) The most affected country is stated to be the USA, and the basic cause of the
crisis is stated to be the financial collapse in the USA, further leading to the instability in the
financial markets. The fraudulent activities of the insiders and the lack of stringent
regulations further are stated to be the fuel to the financial disturbances. The following essay
is aimed to analyze the two major sources of the financial crisis of 2008.
Primary Causes of the Global Financial Crisis
The major causes of the global financial crisis of 2008 can be stated to be the
combination of the speculative transactions, focused chiefly on the property transactions (Ait-
Sahalia, Jobst, Andritzky, Nowak & Tamirisa, 2012). The individuals who had increased
their wealth substantially in the stock market had invested their savings in buying houses.
The increasing demand led to the housing bubble, because in short term the supply of the
houses is fixed, thus leading to a further increase in prices of houses. It is significant to note
that by the year 2002, there was an increase of 30 percent in the prices of houses from the
average rate in the year 1993-1995 (Shiller, 2012). Adding fuel to this, the collapse in the
stock markets further led the investors to invest their amounts into housing as a safe
alternative to the stock market. It is essential to note that the year 2003 witnessed a cut in the
federal funds rate to 1.0 percent, which amounted to lowest among the last 50 years. The
extraordinarily low-interest rates further speeded the run for investments and the prices of
houses, fuelling even more construction activities. The acceleration in the prices of houses
further led to a predictable effect on consumption and savings. As there was an oversupply
and the same could not sustain the prices, the bubble started to burst in the year 2007
(Fiorillo, 2018).
Another major cause that led to the wide economic distress throughout the various
parts of the globe is the global financial integration and imbalances, coupled with the
inefficient monetary policy in the United States. It is significant to note that before the crisis
took place, there was a dramatic increase in the financial globalization and the flow of the

ECONOMICS 2
international capital in a number of countries. The series of the events were positive in a way
that capital inflows and outflows facilitated the capital investments across the border. In
addition, it provided diversification and spreading of the market risks for the investors.
Nevertheless it had a downside as well that cross-border capital movements led to the
exposure of the investments and made them vulnerable in a way that events taking place in
one part of the world, deeply affected the investments and the investor sentiments in the other
part of the world (De Haas & Van Lelyveld, 2014). Thus, while the housing bubble led to
financial distress in the United States, the same affected a number of countries. It must
further be noted that a number of evidence point out towards the fact that inadequate policies
led to the structuring of the financial disproportions. As the federal short term rate was kept
quite low for a very long time, this enabled the banks to take more credit risks and liquidity
risks. The same further enabled a rising demand for the mortgages and supply for the same.
The rise in prices of houses, as stated in the previous segment was due to a further rise in the
mortgages.
Opinion on consideration of major causes
The reason these two reasons are considered chiefly in the work is that firstly there is
a huge interdependence of investments on a number of products in modern financial markets.
The stock market speculations had triggered the housing boom. The complex
interdependence existed not just back then in the year 2008, but the fact still holds
significance. Therefore a relative change in position of one product leads to change in the
value of other interdependence. Further, in the words of Christine Lagarde, the managing
director of IMF; the complex financial systems still lack safety in spite of the establishment
of the responsive strategies, thus regulation of the same through the efficient policies is quite
significant for the nations (Lynch, 2018). Increasing complexities, size, and diverse
characteristics expose them to distress and financial instabilities.
Conclusion
Thus, as per the discussions conducted in the previous parts, it can be concluded that
global financial crisis is one of the major economic crisis of the modern times and a number
of factors had collectively contributed towards the same. The work was an attempt to explain
the two chief causes which formed the base for the financial crisis of 2008. The same was
fuelled by numerous individual national policies and engulfed number of nations across the

ECONOMICS 3
globe. Thus, it would be right to conclude that financial globalization influences economies
worldwide.
References
Ait-Sahalia, Y., Andritzky, J., Jobst, A., Nowak, S. & Tamirisa, N. (2012). Market response
to policy initiatives during the global financial crisis. Journal of International
Economics, 87(1), pp. 162-177.
De Haas, R. & Van Lelyveld, I. (2014). Multinational banks and the global financial crisis:
Weathering the perfect storm?. Journal of Money, Credit and Banking, 46(s1), pp.
333-364.
Fiorillo, S. (2018). What Was the Subprime Mortgage Crisis and How Did it Happen?
Retrieved from: https://www.thestreet.com/personal-finance/mortgages/subprime-
mortgage-crisis-14704400
International Monetary Fund (2010). What Caused the Global Financial Crisis: Evidenceon
the Drivers of Financial Imbalances 1999: 2007. Retrieved from:
https://www.imf.org/en/Publications/WP/Issues/2016/12/31/What-Caused-the-Global-
Financial-Crisis-Evidenceon-the-Drivers-of-Financial-Imbalances-1999-24370
Lynch, S. (2018). Ten years on from Lehmans: Could the 2008 crisis happen again?
Retrieved from: https://www.irishtimes.com/news/world/us/ten-years-on-from-
lehmans-could-the-2008-crisis-happen-again-1.3620641
Shiller, R. J. (2012). The subprime solution: how today's global financial crisis happened,
and what to do about it. UK: Princeton University Press.