Global financial Crisis (GFC)
The present Global Financial Crisis (GFC) has been considered by the financial experts and economists as the worst financial crisis apart from 1930s Great Depression. The GFC led to the collapse of large financial institutions and downturns of the major stock markets globally. The crisis led to the failure of several key businesses and s significant decline in the economic activities. The GFC started on the U.S. mortgage markets leading to the significant turbulence and uncertainty in the global capital markets. (Kalinowski, Marcin 2011). The source of the financial crisis was due to the excessive risk taking because of the sustained low interests rates leading investors to maximize their profits. The root cause of GFC started in 2001 when many U.S. financial institutions increase the number of mortgage loans due low interest rates and the issue led to the increase in the prices of residential real estate. At that period, there was a dramatic increase in the number of group lenders granting loan to people with poor credit history. However, between 2006 and 2007, the reversal occurred, the increase in the interest rates led to the decline in the price of residential properties in the United States. Many high risks borrowers were unable to meet their financial obligations and the crisis that started from subprime loans was transferred to a global liquidity crisis.
The objective of this paper is to explore Global Financial Crisis.
Global Financial Crisis
The intensification of global financial crisis leading to the bankruptcy and collapse of Lehman Brothers in 2008 is the source of current financial and economic problems in the United States. The global financial market is currently facing the financial turmoil, and the subprime mortgage crisis is rapidly spreading to many financial markets across the globe. With the intensification of financial crisis, there is a substantial fall of assets prices and crisis in the stock markets globally led to the liquidity problems of many banks and financial institutions. Unlike past financial crisis such as 1999 Brazilian crisis, 1997 Asian crisis, and 1998 Russian financial crisis, the current global financial is the most influential of all financial crisis because it triggers prolonged worldwide fear and spillover and correlation among international financial markets in both developed and emerging markets.
(Cheung, Fung, and Tsai 2010).
Fig 1: U.S. house prices
The major cause of the GFC is attributed to the subprime mortgage sector and the collapse of housing markets in the United States. Between 1997 and 2006, the prices of American housing increased by 124%, and the decline in the interest rate led to the growth of subprime lending. In the United States, there was intense competition among the mortgage lenders leading mortgage lenders to provide loans to people with bad credit history. Typically, the subprime lending was below 10% before 2004, however between 2005 and 2006, the subprime lending increased to nearly 20%. The concept of subprime lending refers to the action of the some financial houses giving loan to the people with bad or weakens credit history. In 2007, the U.S. Subprime mortgage was estimate at $1.3 trillions. (See Fig 1). Throughout 2000s, there is significant growth of mortgage predatory lenders which is the practice of unscrupulous leaders enticing the customers to apply for unsafe secure loans. A classic technique to lodge people into unsecure loan agreement is by advertising the low interest rates of between 1% and 1.5% for the mortgages. Upon entering into the agreement, consumers will be put into adjustable rate mortgage (ARM) making consumers to pay higher interest rates than the interest rates initially advertised. The practice has made the prices of housing to increase because many people were lured into buying houses due to the practice of information asymmetrical practice of the mortgage lenders. However, between 2006 and 2007, there was a noticeable concern about inflation leading to the increase in the price of the commodities in the United States. Meanwhile, U.S. passed the tightening policy to implement the tight control on the monetary policy. When there was a decrease in the interest rates in 2008, an average U.S. price decrease by 20%. With gradual decline of housing price, many borrowers with adjustable rate mortgage were unable to refinance their mortgage. Many borrowers started to default in their borrowing. By 2007, the lenders foreclosure nearly 1.3 millions properties. The significant event that follows is that sub-prime lending has dispersed and created financial crisis to big mortgage firms such as AIG, Bear Stern, and Lehman Brothers.
Typically, GFC has made investors to the gradual...
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