Essays on Causes of the Global Financial Crisis of 2008 Case Study

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The paper 'Causes of the Global Financial Crisis of 2008" is a great example of a finance and accounting case study. The financial  crisis, especially the credit risk in the banking sector is not a new phenomenon. The past financial panics and disasters, most notable, the Wall Street Crash in 1929, OPEC oil crisis of 1973, Black Monday in 1987, Asian Banking Crisis of 1997, Russian Crisis of 1998, Dot-com Bubble crisis of 2000 and the most recent Global Credit Crunch of 2008 (Ghon, 2008) which give lessons to banks and other lending agencies to be more proactive with the issue of credit risk management.

The world economy has had to endure it in different occasions, and the Global Financial Crisis of 2008 is the most recent crisis whose effect was harshly felt worldwide since the Great Depression in the early 1930s (Cristopher, 2008). Causes of the Global Financial Crisis of 2008 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 (Cristopher, 2008).

The anatomy of the global credit crunch in 2008 emerged from the American housing market, in the sub-prime mortgage. 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%. 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 (Brunnermeir, 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 (Brunnermeir, 2009).

The issue of losses in the housing sector in the U. S. caused the loss of confidence in government-sponsored businesses, and later a global loss of trust in the whole financial system. The proximate cause in the financial markets for the credit risk was catalyzed by banks on the basis of two choices. First, a considerable sum of mortgage-backed securities that encompassed sub-prime risk was incorporated in bank’ s financial statement, despite the fact that banks were supposed to transfer the risk than hold it as hypothesized in originating and distribute model as commonly envisaged in unleveraged pension funds.

Secondly, banks had resolved to finance credit risk and other risky assets with quick-fix borrowings from the market, leading to the spread of TED as shown in Figure 2 below. According to Ghon (2008), this operation became hard for the banking system, with a decline in housing market leading to a rise in seeming risk of mortgage-backed securities, thus complicating further the issue carrying forward the temporary loans aligned with the securities. As a result, banks were required to sell out the assets they were unable to finance, despite the decline in price at the market that was below their real values.

References

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

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

Ghon, Rhee, (2008), “The Subprime Mortgage Crisis: Financial Market Perspective,” a paper presented at the 4th 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: .Washington, DC

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

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