The paper “ Nature of the Recent Global Financial Crisis” is a comprehensive variant of the essay on finance & accounting. The collapse of the United States housing market and the resulting upsurge in mortgage loan default were the major causes of the global financial crisis witnessed in the year 2007-2009. For example, the collapse of Lehman Brothers in the year 2008 sent shocks all over the world financial market. This resulted in a larger and sharper decline in global economic activity (Carbaugh, 2011). The financial institutions that originated and invested in mortgages were heavily undermined due to the loss of hundreds of billions of dollars in those mortgages.
Because of that, creditors and bond investors run from all financial organizations that were deemed to fail. For instance, creditors and uninsured depositors pulled out their funds and cash out securities issued by risky institutions and later invested in U. S Treasury securities that were considered to have no risk on default (Cooper, 2008). The bursting of the housing market that rippled through the entire financial sector was highly caused by; reckless borrowing and spending by customers, provision of easy access to credit by many banks, artificial loose of interest rates by the Federal Reserve, and poor regulation of the financial sector (Cooper, 2008).
Global imbalances amalgamated with the flaws in financial markets developed the defined features of this crisis. The sharp rise in equity risk premiums made the costs of capital to rise while private investments fall and the demand for durable goods collapsed (Carbaugh, 2011). Against the backdrop of sufficient credit facilities, favorable interest rates, and upsurge of house prices, however, the lending standards were relaxed. Generally, the global financial crisis was a crisis of confidence.
Since it started with bad real estate loans and highly leveraged bets accompanied those loans. Thus, credit markets got frozen and many households could not get short term loans required to finance their daily activities (Cooper, 2008). The reappraisal of risk by many households caused them to discount their future labour income and increase savings so as limit the consumption rate.
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