Global Economic Crisis of 2008
The financial crisis of 2008 began earlier in 2007 but the impacts were only felt later. Through the crisis, the financial markets throughout the world crumbled greatly. Stock markets in all countries fell while the prices of goods soared. There was the thought that those responsible for the crisis should have owned up to their creations. However, those who had this in mind failed to take into consideration that the crisis affected everyone, including those who were responsible for causing it. The major cause of the financial crisis is believed to have been the practice of securitization by the banks. Initially, it was though that securitization, which involved transfer of risky debts to ignorant partners, was a creative invention. However, when banks took loans, purchased properties and transferred the loans to the poor, the market began to crumble, eventually leading to the crisis. The trend began in Wall Street and continued to expand through other areas as well. Through Collateral Debt Obligations (CDOs), banks managed to incur even greater losses.
As the debts continued to soar, the assets began to drop in value to market flooding; the lender demanded back their money while some of the banks had invested all funds. This led to the crumble of many financial institutions. In addition to securitization, the Black Scholes model also contributed immensely to the financial crisis. The model involved encouraging people to purchase goods in the future at a price that was set in the presence. This encouraged a gambling culture which formed the key operation characteristics of the financial markets. Greed led to excessive lending beyond the limits of the lenders. Despite the presence of hedge funds to act as securities, the impacts of the black Scholes model were adverse. The fall of the financial institutions was not the only results of the financial crisis.
Due to the immense collapse of the financial institutions, national governments were forced to obtain funds for bailing out the failing financial institutions. This was despite the resistance of many tax payers who claimed that the banks were responsible for the crisis and should therefore not be bailed out. The expenses incurred in rescuing the banks were great. The effects of the crisis also extended to both the rich and the poor individuals. This is because following the financial crisis, banks increased lending interest rate s, the costs of maintaining a credit card also went up. In addition to this, those who had purchased homes were unable to sell them due to the low prices. Governments also began to look for ways to avert the effects of the economic meltdown. The creation of macroeconomic policies and other measures were all aimed at reducing the impacts of the economic meltdown.
The introduction of macroeconomic policies such as reduction in taxes, influx in lending rates and increased investment in public infrastructure all led to increased s peculation among the public. The actions of the governments and banks following the economic crisis were contrary to expectations. However, the banks increased lending through reduced interest rates and the governments reduced taxation to make life bearable for citizens during the difficult economic times. With time, the developing nations are slowly catching up with the developed nations. Financial reforms are recommended throughout the world and particularly within the English nations to help avoid any future occurrences of a similar nature.
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