Question

Economic globalization has led to an increasingly global economy without borders. This has created unprecedented wealth in the world, but also unprecedented risk because local economic crises can easily turn into global crises. This is precisely what happened in 2008/2009 when the American real estate crash created a global recession. Illustrate the history of this crisis: what caused it and how did it become global?Are there any proposals by governments, IGOs, NGOs, or academics, for how this kind of global economic contagion might be avoided in the future?

Answer 1

The financial crisis of 2007-08, also known as the global financial crisis.Many economist considered it to be the most serious financial crisis since Great Depression of the 1930s. The crisis began in 2007 with the depreciation in the subprime mortgage market in the United States which led to international banking crisis with the collapse of the investment bank Lehman Brothers on september 15, 2008.Too much risk taking by banks such as Lehman Brothers help to enlarge the financial impact globally. Massive bail out of financial institutions and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was followed by the Great Recession.

Causes of this crisis are :

• widespread failures in financial regulation,including the federeal reserve failure
• breakdown in corporate governance
• financial firms acting recklessly and took too much risk
• excessive borrowing
• risk by households
• Wall street put the financial system on a collision course with crisis
• lack of full understanding of the financial system
• main policy makers were not prepared for the crisis
• systematic breeches in accountability and ethics at all levels.

The subprime crisis become the global crisis when Lehman Brothers was allowed to collapse.The 2007 financial shock which was limited to G7 Nations only ,mutated into a full blown global economic crisis in september 2008.In the third and fourth quarters of 2008 many advanced and emerging markets experienced major stress in their foreign exchange, stock and debt markets.