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The Global Economic Crises: Causes and Consequences

The document summarizes the causes and consequences of the global economic crisis that began in 2008. Some of the key causes included heavy capital inflows into the US economy from countries like China, low interest rates that encouraged risky lending, and large trade imbalances. As a result of the crisis, many people defaulted on mortgages and loans, causing widespread job losses and declines in real estate and housing markets. The crisis also significantly impacted global economic activity and trade. While regulators and governments attempted interventions, the crisis highlighted the need for more efficient financial market regulation to reduce the impacts of future crises.

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Iqra Munawar
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95 views

The Global Economic Crises: Causes and Consequences

The document summarizes the causes and consequences of the global economic crisis that began in 2008. Some of the key causes included heavy capital inflows into the US economy from countries like China, low interest rates that encouraged risky lending, and large trade imbalances. As a result of the crisis, many people defaulted on mortgages and loans, causing widespread job losses and declines in real estate and housing markets. The crisis also significantly impacted global economic activity and trade. While regulators and governments attempted interventions, the crisis highlighted the need for more efficient financial market regulation to reduce the impacts of future crises.

Uploaded by

Iqra Munawar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Assignment

The Global Economic Crises


Causes and Consequences
Iqra Munawar

14

After the Great Depression of 1930s, a recent economic crisis is the nastiest one world has ever experienced. Accompanied with substantial layoffs, world economies experienced incidents of bank failures, credit crunch, massive defaults and collapse of most reliable institutions. The major event which sent alarming signal to the world financial markets was collapse of Lehman Brothers in September 2008. Unlike the great depression of 1930s which affected mainly European countries, the recent one affected almost each economy of the world, as for now world has become a global village and economies are well integrated and interconnected. When it comes to the causes of economic crises, despite of the extensive research work of almost more than a half decade, on the issue no consensus has been developed among economists. However, most of the explanations come to the conclusion that heavy inflow of foreign exchange in US economy is one of the main reasons of financial crises. The inflow primarily comprised of the capital coming towards US from Asian countries mainly from China. Whenever the supply of funds increases it motivates people to borrow for unproductive purposes. Increased supply of credits at low rates of interest means that people even buy those assets which they could not afford. Banks advanced loans without properly taking into account the risk of defaults associated with these advances. Resultantly defaults on mortgages deprived them of their assets and investments. Financial institutions lost their investments as the governments and monetary authorities remained unable to properly control the actions of markets. Policy of keeping interest rates at extremely low levels added up to the crises. The large current account deficit maintained by US and a huge trade surplus of China can also be regarded as a fundamental cause of economic crises. This scenario represented imbalances in saving and investments in one of the largest economy of the world i.e.US.

The crises left people making them homeless as the housing industry was largely influenced by financial crises. People borrowed a lot for house building and then defaulted. Low real wages as a resultant of economic crises added up to the miseries of households. A big amount of human capital was wiped out reducing the current and future incomes. The actual cost of crises was double the estimated one. In many countries the losses incurred as an outcome of economic crises were far more than the real output of the countries during a particular year. Massive defaults discouraged investments making people unemployed and reduced the opportunities available. As a result of global economic crises the government intervention in the free operation of financial markets was promoted. Governments responded with the instances of monetary and fiscal policies which further resulted in the drop in global economic activity. The impact of government intervention resulted in the widespread trade deficits in the effected countries. On the whole insufficient regulation of financial markets has been blamed the most by researchers to be the reason of financial crises. So we may conclude that efficient regulation of credit markets with the transparency of respective authorities may contribute to lessen the impacts of financial crises. As far as the consequences are concerned, these were not just confined to the economic ones but also have psychological aspects. Crises promoted hopelessness and crime rate in many economies. However the fundamental reason of the economic crises is hidden behind the human instinct of greed.

References
Dunaway, Steven (2009) Global Imbalances and the Financial Crisis.US, Washington: Center for Geoeconomic Studies. YaleGlobal Online: From http://yaleglobal.yale.edu/special_report/728 The Financial and Economic Crises from , .http://unctad.org/en/Docs/gdsmdp20101_en.pdf

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