Causes of the global financial and economic crisis

Document Type:Creative Writing

Subject Area:Economics

Document 1

Millions of employees lost their jobs as the advanced economies went through economic declines. Recovering from the financial crisis was slower compared to past economic declines that were not connected with an economic and financial crisis. Pursuing the non remittance of Lehman Brothers in 2006, the disorder in the financial markets which had begun in August 2007 resulted into a huge financial crisis. Credit flows to the economy reduced and liquidity became difficult. The issues in the financial systems affected the real economy and an unfortunate feedback curve between the real economy and the financial system transpired (Dodig et al. Banks and financial lenders were willing to give out large amounts of loans that were risky due to various reasons. One of the reasons is that competition increased among the financial lenders who saw it as a good economic condition which would otherwise give them good profits at that time.

Sign up to view the full document!

They did not closely look into the borrower's ability to repay the loan; instead they gave out large amounts of loan to investors in the form of mortgage backed securities (loan packages). There was an increase in borrowing by banks and investors in some European nations as well as the United States because they wanted to expand their Mortgage backed securities lending. Unfortunately, house prices began to reduce and this made the banks and investors to incur large losses (Chen et al. Together with the failure of other financial firms a panic began in the financial markets across the world. Investors began withdrawing all their funds in banks and investment funds as they did not want to risk the possibility of a financial system going bankrupt.

Sign up to view the full document!

From $10 to earn access

Only on Studyloop

Original template