CAUSES & CONSEQUENCES OF CURRENT FINANCIAL CRISISTABLE OF CONTENT PAGESIntroduction of Current Financial Crisis03Financial Crisis and Economy of UK05Financial Crisis and Economy of Australia07Financial Crisis and Economy of Asia08Conclusion12References13INTRODUCTION TO CURRENT FINANCIAL CRISIS: A large number of people are still unaware with the term financial and credit crisis. From an Economist view point, a financial crisis occurred when a conflict disordered the money supply and wealth of the economy, or in laymen terms we can say that, when a shortage of cash and liquidity prevails in the economy, it is referred to as financial or credit crisis (Krugman, 2001).
The term financial crisis is applied to a number of scenarios or situations where the financial institution of a country abruptly looses a large part of their asset. The world suffered enormous number of severe financial crisis after the World War II but not a single one resulted in shrinking the world economy in an offense, like the current financial crisis did. Before the arrival of the current financial turmoil, the world’s economy as a whole was stagnate and was moving with a good pace.
Almost all the economical indicators like balance of payment, Foreign Direct Investment (FDI), trade surplus, consumer price index and underestimated unemployment rate showed green signals in the long run for the economy. In July 2007, confidence of the people tumbled from the real estate market and mortgages, known as sub-prime mortgage crisis, from there the U. S market plunged in a severe recession. The mortgage crisis hit badly, the two biggest mortgaging firms Fenny Mae and Fredrick Mac and suppressed them to be default. Because of the default of the two giant mortgaging companies, the moral and confidence of the investors tumbled and the people were reluctant to invest in the real state sector, then the cash shortage occurred in the market in the year 2007, which pushed more industries towards the brink of bankruptcy (Appelbaum, 2009).
In September 2008, financial institutions of USA suffered a severe loss first time after 2 to 3 decades, and urged the giant investment banks, Lehman Brothers and Morgan Stanley to go bankrupt, which had made the economy and financial environment a very difficult time for the economy of US as well as the economy globally (Sorkin, 2008).
American International Group (AIG) had insured many billions of dollars of securities and loans pledged held by a number of banks around the world and after its failure, the money they have rendered became worthless. As per an estimate, the banks pledged over $50 billion in credit with the company which have been lost after the bankruptcy of the biggest group of USA, which urged the liquidity crunch to come on the screen. Before the financial crisis tsunami hit the world, the United States of America dominated the world with its strong economy and currency.
A number of countries in Asia, Middle East, Russia and Europe were indulged with USA in exports and imports business and by the tumbled or deteriorated situation of USA, the said countries also envisaged a negative impact on their economy and from there the financial crunch spread globally like a forest fire. American economy mainly emphasizes on credit, albeit every household borrow money, homes and car loans recurrently that’s why the country didn’t impose any limit on the credit cards of the enterprises and not even on the individuals, which induced the major lending and investing institutions to envisaged a deeper recession, which was the worst after the World War II great depression.