The 2008 financial crisis is considered the worst economic disaster to ever affect the world since the occurrence of the Great Depression of 1929. The crisis led to the collapsing of the financial system in the U.S. and other countries in Europe. Millions of people lost their jobs on either side of the Atlantic because of the financial crisis. Different authorities responded differently to curb the crisis in their backyard. This paper looks at the similarities between the crisis in the U.S. and the one in the Euro Zone while also outlining the difference between the two regions.
In the U.S., the financial crisis was mainly caused by deregulation in the financial industry. Banks were permitted to engage in hedge fund trading with derivatives. As a result, banks demanded more mortgages to support the business. Most of the financial institutions in the U.S. created interest-only loans that became affordable to borrowers who had questionable credit points. The demand for mortgages led to an increase in demand for houses that investors were trying to meet. Availability of loans allowed different investors attempt to grab a share of the lucrative business. The rise in the fed fund rates hit the homeowners with high levels that many people could not afford. The housing prices began to fall, and investors could not sell their houses to make payments for the loans. The increased liquidation in the financial sector led to the housing bubble that spread to Wall Street and other countries in 2008.
Similarly, the Euro Zone crisis that has culminated to numerous debts was caused by two main factors. The first is a lack of a mechanism to prevent the build-up of macroeconomic and fiscal imbalances in some countries. The second reason is a lack of common institutions to absorb shocks effectively. Lower borrowing costs increased the intra-eurozone capital flows as bank loans in various states. Cheap credit was not used in investment but was used to fund housing investments. Most of the countries in the Southern part of Europe ran large current account deficits and faced deterioration in the competitiveness. The housing boom hit peripheral countries such as Spain and Ireland, but the problem started with Greek when the government was unable to finance its debt.
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References
Blinder, A. S. (2013). After the music stopped: The financial crisis, the response, and the work ahead. Penguin Books
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