The paper “ The 2007- 2009 Financial Crisis and Response by the United Kingdom Government“ is a persuasive variant on case study on macro & microeconomics. Since the beginning of the worst world financial crisis, many countries experienced low-interest rates and were in a state of negative growth. There are several macroeconomic and microeconomic factors that led to the crisis. Microeconomic factors are the factors within the banking industry while macroeconomic factors are factors within the economy. The UK government acted promptly to solve the situation. This paper explores both the microeconomic and macroeconomic causes of the 2007 – 2009 global financial crisis.
The paper will also examine the manner in which the UK government reacted to the situation, assessing the success in its effort to solve the crisis. The United States real estate boom was the major macroeconomic factor that led the 2007 – 2009 global crisis. The financial crisis and the estate boom relation was derived from the economic classical theory. The theory states that a burst follows the property boom. Before the beginning of the crisis, there was a rise in housing prices in the United States.
The government supported growth since it allowed people to own houses. This loosened the financial constraints for the individuals whose income was very low (Wignall et al, 2008). The rise in house prices and the slack regulation increased real estate profits, and there was no one who cared about the risks from the housing market. The risk turned to the banks by the mortgage broker creating loans and selling to the banks. The banks responded by securing the loans sold to them by the broker (Crotty, 2009).
The crisis was created since the brokers could not access the risks associated with the loans. The boom was sustained with the rise in house prices and any fall in the housing prices led to the loss in the real estate market. This resulted in the world's worst crisis in the world. Another microeconomic cause of the crisis was Innovation and deregulation in the financial sectors. According to Crotty (2009), the new financial design, which resulted from the development of commercial practices due to deregulation in the financial sectors in the 1980s, led to the banking crisis.
Many Authorities all over the globe denied the rules that were restricting the competition and used the rules with lesser regulations and a high level of innovation. The United States Authority abandoned Glass-Steagall and adopted the Basel II that allowed for securitization (Crotty, 2009). A low level of interest rates was another microeconomic cause of the crisis. It resulted in the search for yields. This increased innovations in the financial sectors in terms of the derivative instruments and the structured finance items created through the securitization.
Low prices of risks and small credits led to speculative bubbles in real estate. However, the macroeconomic policies could not realize the build-up of the risks in the financial sectors coming from price bubbles. This led to the crisis (Valdez and Molyneux, 2010). Another factor that led to the financial market crisis was the subprime lending. This is a macroeconomic cause. It is the act of giving loans to borrowers who have a poor credit history. They have weak collateral or low economic base. They are likely not to pay for the loans granted to them.
The subprime borrowers were not to access the loans. The subprime loans had a short term maturity and installments with a penalty. The subprime mortgage in the United States grew from 10% to 32% during the period of 2003 and 2005 (Mayer et al, 2009). The subprime lending was reduced by factors such as increased securitization, deregulation in the financial system and lack of supervision in the reserve ratio of the economic sectors.
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Crotty,2009), Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture.” Cambridge Journal of Economics, vol.33, pp. 563–580
Mayer, J, Karen M, and Sherlund M.2008, The Rise in Mortgage Defaults, Columbia.
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