How has the Financial Crisis of 2007Affected the Economy? : The Case of the United States (Essay Sample)

How has the Financial Crisis of 2007Affected the Economy? : The Case of the United States
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How has the Financial Crisis of 2007Affected the Economy? : The Case of the United States
Introduction: Historical Background
The global financial crisis that swept across the entire global economy between 2007 and 2008 left many people vague about its causes and its effects on the world economy. The roots of the financial crisis can probably be traced to financial markets’ deregulation in the Western European economies, the US, and the UK that began in the 1970s and took effect in 1980s. The deregulation removed regulatory controls by governments leaving organizations free to trade widely across activities and territories. Before the deregulation, banks, stockbrokers, building societies, and insurance companies specialized in their spheres of trade. Geographically, the operations of these institutions were constrained to their countries. With deregulation, these financial institutions were allowed to operate and make money from financial markets worldwide. Liberalization of credit was the effect since borrowing was made easier making it easy to expand personal debt, especially mortgage debt. The effects were initially felt in the property sector, and later to other sectors of the economy (National and International Issues 2015 p.2). Financial institutions led huge amounts of money to people whose credit worthiness was questionable, and when interest rates rose, the people could barely afford the repayment of their mortgage loans. Default rate increased to record levels with the sub-prime loan defaulters unable to pay their loans. The impact of the defaults cut across the entire financial system because banks and investors had purchased many of the mortgages and other Collateralized Debt Obligations (CDOs), including bonds and assets (BBC NEWS 2009). The credit crunch was occasioned by increased liquidity and loose monetary policy (Martin & Milas 2009 p.1). It was a series of an event after event beginning from low-interest rates and increased lending by banks to sub-prime borrowers, to increased house prices and speculation on financial markets, to the high default rate, then the financial crisis, and finally reduced bank lending that resulted in shrinking of the economy. Therefore, the great recession that began in 2007 can be associated with lax lending standards that increased personal debts and caused real-estate bubbles, housing policies by the US government, and failure to regulate fully non-depository financial institutions.