Causes of 2007 Financial Crisis

The worldwide financial meltdown is among the various types of financial crises, which are known to have serious long-term implications on the global economy. Various financial economists have tried to raise theories regarding the issue as well as trying to offer possible solutions on how to prevent such situations. The global financial crisis, however, has been a regular issue that threatens to shatter our economical hopes completely if serious measures are not taken against it. The current economy is gradually recovering from the first major financial crisis in the 21st century; the 2007-2008 financial crisis which appeared in the U.S and spread to other parts of the world. This paper examines some of the major causes of the crisis and the impact it would have on people across the world.

According to various economists, the 2007-2008 financial crisis came by as a result of an increased combination of the credit boom and the housing bubble witnessed in the US in 2005 and 2006. The housing bubble would see the Americans rushing to buy houses through mortgages. The mortgages would, however, take the unexpected course as the paying rates skyrocketed in no time forcing many citizens to default on their mortgage payments. This would ultimately create the chain of changes that would come to affect the global financial system, leading to the crisis.

The crisis would spread to people’s lives as the unemployment rate increased up to 7.6%, a clear indication that this was turning out to be a global issue rather than a fate for only the Americans as it had been previously presumed. As a result of the heightening financial meltdown, the top global financial institutions would lack money to pay out the deposits to the clients, and thus many deposit accounts were frozen as people tried to withdraw their savings. At the same time, many people had lost their jobs and there was no way they could access their savings from banks since the money to pay out was lacking This intervention caused a complete mess up with various national currencies worldwide, as the money demand increased significantly but the offer was almost on zero. Many banking institutions went bankrupt as the value of the dollar took a relative deterioration as much as the subprime mortgage securities and thus, they had to write them off as losses.

Another reason behind the financial crisis was the lack of wise governmental regulations. This was the government’s failure to predict the imminent meltdown when the stock wealth went to increased house demand that would suddenly be intercepted by the factor of a high-interest rate. This, however, was blamed on the U.S. owing to their misguided decision to influence the banking institutions within the country in offering mortgage loans to completely un-creditworthy borrowers. According to the reports made in 2007, the financial institutions and hedge funds owned more than $1trillion in securities tied to these falling subprime mortgages which were enough to start the real financial mess if more subprime borrowers defaulted and stopped paying out their mortgages.

A serious failure of financial institutions would be witnessed across Europe owing to this downturn. By June of 2007, Bear Steams stopped the functioning of two of their hedge funds and Merrill Lynch would seize $800 million on assets from the hedge funds. This was such a small step compared to what would come to happen later in the real financial chaos that would rear its ugly face shortly afterward. Banks owning much of the subprime securities completely went down, losing billions of dollars, and would either have to find a stronger financial institution to merge with or be declared bankrupt. It was actually impossible to keep the staff as the merging took place and for this reason, most banks would have to lay off most of their staff thus contributing to high rates of unemployment.

The liquidity problem occurred in almost every major financial institution and some of the governments would imply unanimous actions so as to save banks from collapsing by providing the required liquidity support. By the end of 2008, the Federal fund rates and the discount rates were decreased to 1% and 1.75% respectively. Many central banks also implied the rate cuts and tried to help the biggest financial institutions by providing liquidity support. More importantly, the U.S. government presented the National Economic Stabilization Act of 2008 which created the condition of $700 billion to buy distressed assets, especially mortgage securities. Other governments would provide their version of bailout packages, outright nationalizations, and other government guarantees to support the world’s economy.

This financial crisis, however, would have a mild impact on GCC countries compared to other regions of the world. This was as a result of the strong financial markets associated with the Arab-rich GCC nations. In other terms, the fate of the GCC countries was much similar to that of most developed nations. To start with, GCC banking institutions were relatively less impacted by the crisis with the exception of banking facilities in some countries such as Qatar and UAE. The abundance of strong markets and financial resources, coupled with the macro intervention policies initially taken by these governments would help in mitigating the adverse impact of the crisis. Even though the consequences of 2007-2008 financial had spilled in all parts of the world, the GCC nations were relatively better positioned to survive the fate with minor lasting implications. This would be perceived through the approach of some countries such as Saudi Arabia which had resolved in multiplying their government spending in an attempt to save its population from the heightening recession.

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