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The 2007-2008 Global Financial Crisis

The 2007-2008 Global Financial Crisis

The 2007-2008 Global Financial Crisis. The fiscal catastrophe of 2007–2008, often known as the subprime mortgage crisis, was caused by the fall of the U.S. residential market and was associated with a substantial decrease of availability in the international financial markets (Rodney). It threatened to topple the global financial system, brought down (or nearly brought down) many significant investment and commercial banks, mortgage lenders, insurance firms, and savings and loan associations, and sparked the worst economic downturn since the Great Depression, known as the “Great Recession” (2007–2009). The economic meltdown is a catalyst for changes in global governance and a departure from the status quo of capitalism.

Economic circumstances in the U.S. and other nations were favorable in the years before the GFC. Low unemployment, inflation, and interest incidences accompanied strong and consistent financial growth. In this setting, home values climbed rapidly (Rodney). Homes were bought and built with reckless borrowing by families, particularly in the US, who anticipated that home values would climb further.

Property speculators and families in European nations similarly took on excessive debt due to similar expectations regarding home values. Particularly in the United States, many housing mortgages were for sums that were comparable to (or even more than) the purchase value of a home (Permeti and Mjeda). Investors looking to make quick money by “flipping” houses, as well as “subprime” lenders (who have higher default risks due to their earnings and assets being relatively low, and/or they have missed loan repayments in the past), accounted for a sizable portion of this risky borrowing.

The 2007-2008 Global Financial Crisis. Until the Great Financial Crisis, banks and other investors in the U.S. and overseas borrowed more money to increase their lending and buy MBS securities. Leverage increases when money is borrowed to buy an asset, which can raise both potential gains and losses (Permeti and Mjeda). As a result of taking on so much debt, banks and investors suffered significant losses as housing values started to collapse. In addition, banks and certain investors obtained money for longer and longer periods of time, often overnight, to buy assets that were difficult to sell. As a result, they were forced to depend more and more on lenders, including other banks, who provided new loans as old short-term loans were returned.

 

What was the impact of the financial crisis of 2007 2008?

MBS products and subprime loans were subject to too little regulation. Particularly, there was little oversight of the organizations that produced and offered investors sophisticated, opaque MBS. Not only were many individual borrowers given loans that were too big for them to manage, but fraud was also becoming more prevalent. Examples include exaggerating a borrower’s income and misleading investors about the security of the MBS products they were being offered (Permeti and Mjeda). Additionally, many authorities and central banks failed to properly comprehend the extent to which subprime loans had been stretched during the surge and the numerous ways housing losses were flowing across the economic industry as the catastrophe developed.

 

 

Conclusively, the economic meltdown may be a catalyst for changes in global governance and a departure from the status quo of capitalism. The severe disconnect between the present-day mechanisms of government and the world’s economic order has been made clear by the global financial crisis (Rodney). It must change if global governance is to achieve goals for the world economy and respond to difficulties. The primary function of global governance is to oversee the global economy while considering the opinions and objectives of all stakeholders.

 

 

Works Cited

Permeti, Eneida, and Blerta Mjeda. “The Financial Crisis: Origins, Causes and Conclusions.” Academic Journal of Business, Administration, Law and Social Sciences, vol. 1, no. 1, 2015, iipccl.org/wp-content/uploads/2015/03/Ajbals-100-107.pdf. Accessed 10 Jan. 2023.

Rodney. “The Global Financial Crisis.” Reserve Bank of Australia, 2019, www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html. Accessed 10 Jan. 2023.

 

 

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