Analysis of the Global Financial Crisis's Impact on Economy

This report provides an in-depth analysis of the 2009 global financial crisis, examining its origins in the U.S. sub-prime mortgage market and the subsequent collapse of financial institutions like Lehman Brothers. The paper details the causes, including securitization and complex financial products like CDOs, and their role in spreading the crisis globally. It explores the impacts on financial structures, such as the freezing of credit markets and the decline in private wealth, and the effects on the global economy, including reduced industrial production, decreased GDP in developed nations, and increased unemployment. The report also discusses the crisis's impact on developing countries and the overall loss of confidence in financial systems and markets. The conclusion highlights the shift from relaxed credit conditions to tighter markets and the resulting global economic activity.

Running head: FINANCIAL INSTITUTITONS AND ECONOMY
FINANCIAL INSTITUTIONS AND ECONOMY
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Table of Contents
Introduction................................................................................................................................2
The Causes.................................................................................................................................2
The Impacts................................................................................................................................4
Impact on Financial Structure................................................................................................4
Impact on Global Economy...................................................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................7

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Introduction
The ‘Global Financial Crisis’ of the year 2009 is counted among the most important
shocks that have occurred in the time period after the war. The central and the primary point
of origination in relation to the aforementioned crisis is considered to be in connection to the
credit markets in the developed nations. The crisis was particularly centered in the nation of
the United States, the nation of the United Kingdom and the continent of Europe. However, it
may be stated that the impact in relation to the fallout of the crisis has been felt in every
region and nation. After the intensification regarding the crisis, there was drastic change in
the craving for risk regarding the financial markets of the world, and the capability or
aptitude of such markets to take risk. This paper discusses the impact on the financial
structure and the global economy in connection to the ‘Global Financial Crisis’ of the year
2009.
The Causes
The instant root or source relating to the crisis is considered to be the advent of the
problems and issues in the market of the nation of United States regarding the sub‐prime
loans for housing in the early months of the year 2007. As per the US terminology, ‘sub‐
prime loans’ are regarded as the loans, which fail to fulfill the basic standards mandated for
good credit quality, for instance a good and comprehensive history of credit in relation to the
borrower, sound documentation regarding the income and a conventional ‘loan‐to‐valuation’
ratio. A significant facet in connection to the period of the crisis was the securitization
regarding the sub‐prime loans and other kind of loans by the initial lenders of the loans and
the consequent sale of such loans in relation to other investors. This transpired partially
through the securities, which were backed by conventional mortgage. However, it may be
said that it also occurred primarily through more intricate and complex products like the

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‘Collateralized Debt Obligations’, also known as the CDOs that played a significant role in
the distribution and the dissemination in relation to the crisis (Sargunam, Kumar & Mary,
2016).
When the problems and the issues discussed above, initially became apparent, in the
early months of the year 2007, the impacts appeared to be restricted mainly to the financial
sector of the nation of United States. The initial noteworthy effects in relation to the global
markets originated in the month of August of the year 2007. During this time period, the chief
bank of the nation of France named BNP‐Paribas declared the deferral relating to three of the
funds of the bank, which were investing and financing in the mortgage securities of the nation
of United States. The aforementioned declaration represented the datum that an approximate
quantum regarding the European banks, or the ‘off‐balance‐sheet’ transits connected to the
banks, had mad heavy investments regarding the mortgage securities of United States and
hence, might be unprotected in relation to considerable losses (Peric & Vitezic, 2016).
In the succeeding months, the crisis amplified and expanded because more
information and data in relation to the degree of losses were discovered and exposed. Such
information included certain developments. Firstly, it was the course relating to the British
bank named ‘Northern Rock’ in the month of September of the year 2007 that resulted in the
nationalization of the bank. Secondly, it was a sequence relating to huge losses that were
declared by the chief banks and the investment banks in the nation of United States and
shortly after, in the continent of Europe. Thirdly, it was the salvage regarding the investment
institution named Bear Stearns in the month of March of the year 2008. It may be said that
Bear Sterns sustained and marked a turning point, and for a minimum time period the
conditions of the market started to become calm and mellow down. However, the crisis
increased and deepened severely in the month of September of the year 2008, predominantly
in relation to the miscarriage and catastrophe regarding the investment bank of the US named

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Lehman Brothers. It was the first time regarding the crisis that losses had been suffered by
the creditors of a foremost financial organization. After the collapse of the Lehman Brothers,
two federal mortgage agencies of the US named Freddie Mac and Fannie Mae were
effectively nationalized. The aforementioned events were trailed by the nationalization in
relation to the largest insurance establishment of the world named ‘American International
Group’ also known as AIG. There were also other declarations relating to the near-failure or
the failure regarding the financial organizations in the continent of Europe as well as the
nation of United States (Dudas & Dudasova, 2016).
The Impacts
The events in relation to the crisis as discussed above, generated a severe loss in
relation to the confidence and assurance. Such loss relating to the confidence was not only in
connection to the financial sector or zone, it also included the businesses and the households.
In the following weeks after the collapse of the Lehman Brothers, the equity markets of the
world experienced severe instability and unpredictability.
Impact on Financial Structure
The ‘global economic crisis’ initiated in the financial segment of the economies of the
advanced nations, commencing with the problems and issues relating to sub-prime
mortgages, and the breakdown regarding the securities that are backed by mortgages in the
nation of the United States. The immediate aftershocks in relation to the financial crisis were
felt by the developing nations that were meticulously connected to the international financial
markets, because the capital took shelter in the safe sanctuaries and there was a swift and
speedy transfer regarding capital from the evolving and the emergent markets towards the
economies of the advanced nations, mainly the nation of the United States. However, it may
be mentioned that the initial impact in relation to the ‘less developed countries’ (LDCs), was

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less marked and prominent because the LDCs were not incorporated into the international
financial industry or the markets. As the financial crisis deepened and intensified, the
freezing in relation to credit was done, and the market value regarding private wealth were
severely reduced or decreased, the financial crisis became a crisis in relation to the actual
economy, which began in the year of 2008. The impact regarding the LDCs have been much
more during the later time period of the actual economic crisis (Koser, 2016).
The ‘global economic crisis’ resulted in the severe decrease in relation to the world
trade, and swift and speedy drop in relation to the prices of the commodities. This is
considered to be a primary mechanism, which has affected the LDCs. The flows relating to
the ‘foreign direct investment’ or the FDI that attained their maximum level in the year of
2007, have been decreasing hastily from the time of the commencement of the international
financial crisis. As per the study and analysis of the commentators, the ‘global financial
crisis’ is considered to be the largest banking overhaul since the meltdown in connection to
‘savings-and-loan’. It has been stated by the investment bank named UBS that the year of
2009 would be able to perceive a clear and an unambiguous recession for which there shall be
no retrieval or salvage for an approximate time period of two years. In the nation of Iceland,
the economic crisis affected all the primary banks of the nation (Magalhães, 2017).
Impact on Global Economy
It had been evident and obvious that due to the ‘global financial crisis’, the conditions
and the circumstances in the primary economies of the developed nations became
unimaginably worse during the time period after the collapse of the Lehman Brothers in the
month of September in the year of 2008. The degree of confidence in relation to the
businesses and the consumers considerably depreciated because of the financial crisis. Even
the financial sentiment reduced rapidly due to such a catastrophic event. In the universal
environment relating to uncertainty, improbability and vagueness, the households and family

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units all around the world retorted by reducing their discretionary and flexible outgoings and
expenditures. Such reduction appeared to have had specifically a noticeable and distinct
impact in relation to demand regarding the manufactured commodities and goods (Chatrakul
Na Ayudhya, Prouska, & Beauregard, 2019). As a result of such financial crisis, the industrial
production fell sharply on a global scale. There had been significant contractions in relation
to the GDP of the economies regarding the advanced nations. The economies of the nations
of the eastern world, particularly China and India, had a consistent expansion of their
economy, although such expansion had been very slow (at decreased rates). It may be said
that the actual GDP (output regarding services and goods produced property and labor
situated in the nation of US) decreased considerably. The unemployment rate in the
aforementioned nation augmented to 9.5 percent in the year of 2009 (Blažek, Hejnová &
Rada, 2020).
Conclusion
In the conclusion, it may be said that as a consequence of the financial crisis, there
was a transferal from the easy and relaxed conditions of credit, which had sustained for
certain years, to a condition relating to tight credit and under certain occasions dysfunctional
markets. This was complemented by a loss regarding business confidence and consumer, with
noteworthy impacts relating to global activity. This paper have discussed and primarily
focused on the chief causes regarding the crisis, and how it impacted the economy of the
world.

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References
Blažek, J., Hejnová, T., & Rada, H. (2020). The impacts of the global economic crisis and its
aftermath on the banking centres of Europe. European Urban and Regional Studies, 27(1),
35-49.
Chatrakul Na Ayudhya, U., Prouska, R., & Beauregard, T. A. (2019). The impact of global
economic crisis and austerity on quality of working life and work‐life balance: A capabilities
perspective. European Management Review, 16(4), 847-862.
Dudas, T., & Dudasova, M. (2016). Growth of Chinese investments in Europe after the global
economic crisis of 2008-2009. Економічний часопис-ХХІ, (160), 9-14.
Koser, K. (2016). The Impacts of the Global Economic and Financial Crisis. In Security,
Insecurity and Migration in Europe (pp. 83-96). Routledge.
Magalhães, P. (Ed.). (2017). Financial crisis, austerity, and electoral politics: European
voter responses to the global economic collapse 2009-2013. Routledge.
Peric, M., & Vitezic, V. (2016). Impact of global economic crisis on firm growth. Small
business economics, 46(1), 1-12.
Sargunam, S. S., Kumar, A. S., & Mary, T. (2016). Global Economic Crisis-Causes and
Consequences. ITIHAS The Journal of Indian Management, 6(1), 26-30.