ECON 1285 S1 2019: Economic Analysis of the 2007-2008 Financial Crisis

This essay provides an analysis of the 2007-2008 global financial crisis, highlighting its causes such as deregulation in the financial industry, the growth of subprime mortgages, and the dot-com bubble. It discusses the impact of the crisis on the European and American economies, including the loss of stock values, bank failures, and government interventions. The essay also draws a parallel to Benjamin Graham's statement about the market being a voting machine in the short run and a weighing machine in the long run, emphasizing the recovery of the European market. Furthermore, it delves into the dot-com bubble of the 1990s, its causes, and its eventual burst, along with the aggressive policies of the Federal Bank that aided in the financial recovery. The essay concludes that the market confidence returned in 2009 after the crisis had a huge impact on the stock markets.

Running head: ECONOMICS
Economics
Name of the student
Name of the university
Author note

ECONOMICS
Assessment 2
Introduction
The global financial crisis which took place in 2007 – 2008 had been one of the most
serious financial crisis. The global financial crisis led to the worst recession of European
Union in its six decade history (Graham 2015). This financial crisis had been mainly caused
as a result of deregulation in the financial industry. Another reason is due to growth of
subprime mortgages and the tax policy which is known to have a significant effect on the
flow of capital along with the dot com bubble which took place few years ago.
Analysis
Although presently, the economy of Europe have expanded a lot and is performing
very well. Therefore, the above situation is similar to the statement made by Benjamin
Graham that “in the short run the market is a voting machine but in the long run it is a
weighing machine”. Therefore, though the European market have suffered a huge loss during
the financial crisis at that point of time, the economy have now expanded a lot. Banks are in
better position, unemployment is at its lowest and also the public finances are in much better
shape. The growth of economy, rate of interest and investments are experiencing positive
levels. During the time of global crisis, the stock prices have lost more than two third of the
value. The American International Group was also on the stage of bankruptcy where Fed
demanded the entire asset of AIG as collaterals for the loans. Both the European as well as
the American economy was ineffective in setting the market price. After hitting by the
recession, the banks in the united states have lowered the rate of interest. This also lowered
the banks income which were based on loans. The percentage of subprime mortgages also
increase heavily where homeowners found it cheap to buy mortgages leading to asset bubble
which then lead to banking crisis. At that time some of the investment banks entered into the

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market to take advantage of the housing boom. The credit default swaps increased a lot in
2004 and by the end of 2005 were heavily involved in credit insurance market. In 2007, the
stock market have already collapsed leading to the financial crisis. However the aggressive
policy of the Federal Bank have helped the financial performance to recover.
The dotcom bubble took place in the 1990s in United States. At that point of time the
internet usage had increased tremendously and many online shopping companies failed and
shut down. The stock had also declined by more than 80 percent. As a result of this bubble
any investors were eager to invest leading to rise of venture capital. The stock market
suffered a huge loss where Nasdaq lost 7.6 percent in one day, the Dow Jones Internet
composite index also dropped and Microsoft was down at 63 percent on that year were April
14, 2000 were termed a s Black Friday.
However, the Dow hit all time high after few years and the economy recovered
quickly. One of the reason an be the increased in government spending, reducing the cost of
borrowing. After that the Fed also reduced its fund rates to 1.25 percent.
During the phase of the dot com bubble the value of the equity market grew
exponentially. During the period of the dot com bubble, huge amount of investment was
made in the stock markets. During the year 1993, the release of the Mosaic web browser
made access to the world wide web possible and the internet usage have increased a lot after
that. During those years, many new companies were also found. At the same time low interest
rates had increased the capital availability which fueled investment and many investors were
eager to invest in any dot com company. Venture capital was also easy to raise. The
combination of increasing stock prices along with the confidence that the companies will be
profitable in future lead to stock market bubble. The stock market also rose to 400 percent
between 1995 to 2000 as a result of boom. On March 10, 2000, the NASDAQ Composite

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stock market index peaked at 5,048.62. however, after the dot com bubble burst, investors
were forced to sell their stocks. After further accounting scandals, the stock market downturn
took place where the stocks had lost $5 trillion in market capitalization. The stock market in
the United States of America peaked during 2007, when the Dow Industrial Average
exceeded 14000 points. After four years however it reached all time high

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Conclusion
The market of United States have also suffered a lot due to the global financial crisis.
The financial crisis plunged many countries into a Great Recession and negatively affected
the global stock markets. The stock market have also suffered a huge loss due to the dotcom
bubble however, the market recover after few years of the crisis. The market confidence
returned again in the year 2009 since the financial crisis had a huge impact on the stock
markets. Graham used the statement “in the short run the market is a voting machine but in
the long run it is a weighing machine” in order to highlight that stock market will impose
high price from time to time and buying stocks is generally risky in nature.

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Reference list
An, B., 2017. Changes in capital structure of listed emerging market firms in the aftermath
of the 2007–2008 global financial crisis (Doctoral dissertation, Southern New Hampshire
University).
Graham, B., 2015. Animating Mr. Market.
Haldane, A.G., 2015. 4. The Costs of Short‐termism. The Political Quarterly, 86, pp.66-76.
Martin, I. and Papadimitriou, D., 2018. Sentiment and speculation in a market with
heterogeneous beliefs.