Global Financial Crisis

The 2007 global financial crisis was a major event in world economy due to the adverse effects the crisis had on the economy. The financial crisis is believed to have been caused by several factors. The key cause associated with the crisis was the operation of the bankers. According to studies, bankers initiated the crisis through engagement in practices that involved organization of business deals referred to as derivatives. In this aspect, the banks acquired properties through mortgage. The properties were then sold to willing buyers who would purchase the properties.

The banks consolidated the mortgages and s old them to individuals and private organizations that were willing to invest. Due to the rise of this particular business, banks offered loans to customers above their borrowing limits. Those who had low credibility ratings were also approved for loans leading to many high risk loans. The demand to invest in this business made many people to rush into loans in order to cater for their investments. Less stringent regulations imposed by financial institutions on borrowers led to massive lending and borrowing, which eventually increased the risks associated with the businesses (Luc Laeven et al., 2010).

While bundling resources towards these mortgages, banks did not put into consideration the potential risks associated with the businesses. However, after collection of massive loans, the borrowers began to default on the payments. This resulted in shock among the financial institutions. Some of the institutions began to collapse making it critical for the governments to come in to help raise the financial status of the institutions. As the financial institutions were bailed out of their woes, some people lost their jobs. The financial crisis thus led to both job loss and bankruptcy across the world. The US puts into place policies that can help to avoid recurrence of a similar event.

Reference

Luc Laeven, D. I., Claessens, S., & Dell’Ariccia, G. (2010). The Lessons and Policy Implications from the Global Financial Crisis. New York: International Monetary Fund.

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