Essays on Why a Crisis Started in the United States in 2007 Spread So Rapidly to the Rest of the World Coursework

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The paper 'Why a Crisis Started in the United States in 2007 Spread So Rapidly to the Rest of the World" is a good example of macro and macroeconomics coursework.   The competitive transformation in the global financial markets shows that the world has globalised financial markets and globalised financial institutions, but the lingering question was whether there is a global system of regulation based on the credit crisis that started in the US in 2007 and spread all over the world. This paper focuses on the globalised financial markets and globalised financial institutions and the significance of having a global system of regulation, and whether such system could have solved the crisis of 2007 by giving details what drove that spread and whether and how global governance might (or might not) have made a difference (Liebowitz, 2009).

The past financial panics and crisis, most notable, the Asian Banking Crisis of 1997, Russian Crisis of 1998 and the most recent Global Credit Crunch of 2007 give good lessons to banks and other lending agencies to be more proactive with the issue of credit risk management and need to have a global system of regulation. Causes of the global financial crisis in 2007 The financial crisis, especially the credit risk in the banking sector is not a new phenomenon.

The world economy has had to endure it in different occasions, and the global credit crunch in 2007 is the most recent crisis whose effect was harshly felt worldwide since the Great Depression in the early 1930s (Liebowitz, 2009). The main factors that contributed to the global financial crisis include macroeconomic setbacks, failures in financial markets and deficiency in the implementation of the policy.

The growth and development of the financial sector have complicated issues making it hard for regulators to control the intricacies in the system (Fried, 2012). Presently, the banking system encroaches with several risks that are more prevalent than before, making it even hard for internal control to fail in some cases. The anatomy of the global credit crunch in 2007 emerged from the American housing market, in sub-prime mortgage (Reischauer, 2010), the house prices had increased steadily since 2004, thus many investors were attracted in the sector, and, however, in 2006 it peaked and then had a drastic drop of more than 30%.

The decline was so enormous since 1930 and resulted in the depletion of bank capital because of unexpected disruptions as housing debt started to increase considerably in the market due to a sharp contraction in credit supply. This had adverse effects not only in U. S. banks and other investment banks in Europe but went out of control and spread globally. It is supposed that during 2007 sub-prime mortgages had started experiencing some losses after a rapid growth at the financial markets (Liebowitz, 2009).

This forced some institutions like BNP Paribas to freeze their redemptions in three funds that had been invested in structured products, as it became hard to estimate the portfolio held. Also because of losses in the sub-prime mortgage, the counterparty risk for U. S. banks and Euro Zone rose sharply, leading to increase in interbank rates; interest rates banks are charged when they borrow from one another (Norberg, 2009),

References

Acharya, V., and Matthew, R. (2009), Restoring Financial Stability: How to Repair a Failed System, New Jersey: John Wiley and Sons Inc., Hoboken.

Antif, M. & Amir S., (May, 2008). The consequences of mortgage crisis expansion: evidence from 2007 mortgage default crisis, University of Chicago Graduate School of Business.

Barnett, W.A., Geweke, J. and Shell, K. (2010). Managing investment risk: Stock market. Cambridge University Press, New York.

Brunnermeir, M., 2009, Deciphering the liquidity and credit crunch 2007-2008, Journal of Economic Perspectives vol. 23, pp. 77-100.

Borio, C., (2008), The Financial Turmoil of 2007: A Preliminary Assessment and Some Policy Considerations, BIS working paper no. 251.

Christopher, R.W. (2008), The Subprime Crisis - Cause, Effect and Consequences. At Indiana State University

Fried, J., (2012). Who Really Drove the Economy into the Ditch?, New York, NY: Algora Publishing

Ghon, Rhee, (2008), “The Subprime Mortgage Crisis: Financial Market Perspective,” a paper presented at the fourth APEC International Finance Conference, November 10, 2008.

Liebowitz, S., (2009), Anatomy of a Train Wreck: Causes of the Mortgage Meltdown. Oakland CA: The Independent Institute.

Norberg, J. (2009), Financial Fiasco: How America's infatuation with home ownership and easy money created the economic crisis, Cato Institute.

O’Quinn, R. (2008). The U.S. Housing Bubble and the Global Financial Crisis: Vulnerabilities of the Alternative Financial System (1-51). Washington, DC

Reischauer, D. R., (2010), Subprime Mortgages: Americas Latest Boom and Bust, Washington, D.C.: Urban Institute Press.

Taylor, J., (2009), Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis, Hoover Press.

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