Global Financial Crisis

An analysis

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Introduction
Since 2007, the U.S. and global economies have struggled through the worst nancial crisis since the Depression of the
1930s. Major businesses have failed; large American and European banks were forecast to lose roughly $2.8 trillion
between 2007 and 2010; the S&P 500, a major stock index, fell 45% from its high in 2007; and more than $8 trillion in
wealth was erased between the height of the stock market and November 2008. (Americans total net worth shrank by
about 25%.) Unemployment reached the highest levels in 15 years; more than a million families have lost their homes to
foreclosure; and many nations governments, including ours, have spent billions to keep banks and other businesses aoat.
While there are signs of recovery, including a partial recovery in stock prices, the world still seemed to be in the grip of
persistent recession as of summer, 2013.
Beginning with the devastating and recent example of the Global Financial Crisis, it comes to proves that globalization is
really a fact and that it has positive aspects but also negatives. As we can see on page number 4, The primary reason that
this nancial crisis has caused so much damage and was allowed to happen in the forts place is down to globalization.
In eect, the crisis has an origin located chronological and geographically: the sub-prime mortgages in the United States,
but it ended being a global phenomenon.
Indeed, it seems required to explore in the farthest depths of the reasons, to explain its intensity as well as its global
amplitude. For that, we comprise interesting to analyze dierent factors and to ask ourselves some dierent questions
beginning with if its an economic crisis or just a nancial one and analyzing what happened in the United States, we should
focus aswell why did this crisis have this huge expansion and if it had any precedent; but we also have to deliberate if its
possible to prevent similar incidents.
We will answer all this questions through the dierent texts provided in the case study.

Is it and economic crisis or just a financial crisis?

According to many authors, the nancial crisis is the result of other economic crisis which was older and deeper, and that
has a lot to do to do in the crecent importance of the nancial system in the economy; The nancial industry became
bigger and played a greater part in the overall economy.
As the economist Hyman Minsky pointed out, the desregulation of the nancial markets and the insertion of new high
risked products ended up in a nancial crisis and as a result of this into and economical crisis.
After analyzing if it have been a nancial or an economic crisis, we should go to the dilemma of it this crisis was the result
of a bubble bursting that happens continually throughout history, rather the existence of globalization and the extent to
which it can be cited as facilitating the current global nancial crisis.

What happened in The United States?

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The global nancial crisis (GFC) or global economic crisis is commonly believed to have begun in July 2007 with the credit
crunch, when a loss of condence by US investors in the value of sub-prime mortgages caused a liquidity crisis. This, in
turn, resulted in the US Federal Bank injecting a large amount of capital into nancial markets. By September 2008, the
crisis had worsened as stock markets around the globe crashed and became highly volatile. Consumer condence hit rock
bottom as everyone tightened their belts in fear of what could lie ahead.
The housing market in the United States suered greatly as many home owners who had taken out sub-prime loans found
they were unable to meet their mortgage repayments. As the value of homes plummeted, the borrowers found themselves
with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the
repossessed house and land was worth less on todays market than the bank had loaned out originally. The banks had a
liquidity crisis on their hands, and giving and obtaining loans became increasingly dicult as the fallout from the sub-prime
lending bubble burst. This is commonly referred to as the credit crunch.
As it is said in page 2: The credit crunch thus emerged as very little money was being lent out in the whole economy.

Why that Global Expansion?

First at all, because the derivatives and other nancial products had been sold to banks and investors all around the world.
Therefore, when we entered the crisis, the bank industry made it as a global level. For understanding this we should go to
the Iceland (and its consequences in England), which is probably, the most ilustrative of the previous explanation.
(GDP growth rates in percentage terms)

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October 2008 the Icelandic banking system collapsed, it was in large part caused by the collapse of the sub-prime
mortgage market in the USA because the freese in credit made Icelandic banks unable to trade. This aected the UK
economy because many British charities and unicipal governments had invested huge amounts of money in Icelandic
banks during the boom years.
The economic and investor crisis, the absense of liquidity, the reduction of the credits and of the expanded money,
consequently, all around the world.The globalization of the property bubble, that is at the base of the banking crisis,
favored its spread all around the world. In this means, the spanish example is specially signicant, even more to the
dependance of the spanish economy and its building activity.

Does this crisis have precedents?

According to authors on page 2, the globalization is not something exclusively of this crisis, but it appeared in other
moments and that studying the economic history we can understand in a better way the existence of globalization and the
extent to which it can be cited as facilitationf the currents global nancial crisis.
In this sense, we can remark some examples like the England crisis between 1824 and 1826, The Crack of the 29, the rst
petroleum crisis (1973-1975), the second petroleum crisis (1980-1982), the Asian Crisis (1997) or the bursting of the
dot.com bubble (2001), where you can see the globalized character of the same, although with less consequences. It is,
also, a global phenomenon, as we said, the own property bubble that comes associated to the nancial crisis.

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Is it possible to prevent new similar episodes?

Alan Greenspan, comes to point out that exist some kind of periodic character in this type of crisis, as history
demonstrates, subtracting value to the universal inection character.
Without dismissing the previous information, it seems to have demostrated the global character of the economy in the
current world, for what the individual actions of the states will try to correct but not avoid, the eects of those global
phenomenons. Act accordingly, some actions can and must be complimented.
There is a remedy to the bleak picture we have drawn here. Indeed, implementing a set of policies globally the
international community would respond to the current situation of weakness capital markets , tight credit, massive job
losses and increased poverty .
This set of policies would have to adopt an approach based on three pillars. An immediate goal is to stabilize the nancial
sector and restore condence in capital markets . Beside that requires a stimulus macroeconomic give impetus to domestic
demand , which would support for the overall economy and job creation . Finally, for mitigate the negative eects of the
crisis on disposable income and income inequality should be strengthened social welfare systems and protect the rights of
workers. Experience shows that the Social dialogue can be useful for the design of a set of measures eective .
The main novelty of this set of policies proposed here is that not only help to alleviate the current situation, but also rectify
the global imbalances that are at the root of the nancial crisis.