Global Financial Crisis 2008

Introduction

In the year 2008, the world economy got into recession following economic fallout in the United States of America and some major European countries (Raja, 2008). After a fairly fast economy growth in the US, the crisis came up following a number of factors, for example, the bursting of the housing bubbles in the US and other large economies, soaring commodity prices and the increasingly restrictive monetary policies in a number of countries and lastly the stock market volatility.

One of the monetary policies that caused the global financial crisis was Securitization, where banks come together to join their loans and sell them off. This was dangerous because it gives risky loans to many people who could not afford to repay back at high interest rates (Pinyo, 2008). In the process, prices of properties fell triggering a crisis in the Subprime mortgage market (Rhodes & Stelter, 2010). According to Corbbet (2008), another monetary policy that caused the crisis was the lowered lending rate to 1.00%, this led to reckless lending habits by mortgagers thus creating the housing bubble. The investors saw this as an opportunity and they began giving loans to unsuitable candidates (Pinyo, 2008).

 

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In order to restore order, capital was injected to save them (reaction) Corbbet (2008). In the process the value of properties began depreciating, lenders wanted their money back so the banks also started to suck back their money and it became so hard to get credit.The solution was a short term remedy because as it witnessed in the USA and Europe, a number of major financial institutions failed (Paleaz & Paleaz, 2009).

The first fiscal policy that caused the crisis was the increasing amount of debt assumed by consumers. Another fiscal policy causing the crisis was the excessive leverage of banks and other financial institutions. The loans started to default and so in order to fix things, Ben Bernanke, the current chairman of the Fed injected billions of dollars into the Wallstreet banks as a form of liquidity and in effect the value of the American dollar began depreciating (Corbbet, 2008). George Bush signed a bill that will pump some $150 billion into the American economy for U.S. consumers to spend (Vardy, 2008), but this solution only worked for a short term. This is because the US went to a decline, evidenced by its challenges in Iraq and Afghanistan, and its declining image in Europe (Reynolds, 2008).

In my opinion, the government harmed the economy before the crisis since it encouraged low lending rates. It also harmed the economy by injecting billions of dollars in order to save the situation only for this to lower the value of the dollar. Personally, what I would have done differently is keenly observe the initial indicators of a possible crisis and come up with a list of macro policy recommendation and prudential regulations to curb the crisis at its earliest stage. Secondly, I would have avoided the lowering of bank lending rates and also loaning the poor borrowers who are not able to pay back the loans with the required interest.

Conclusion

Global financial meltdown has affected the livelihoods of almost everyone in this increasingly inter-connected world, but despite this fact, it is somehow appropriate to say that the globe is slowly recovering from this financial crisis. This is because of the intervention by central banks and governments in an effort to fix the damage that has been caused. Even though, the situation has been fixed, many of important banks remain weak, and it will take years for them to recover from the shock.