Question

There have been international financial crisis that have started in a given region, for example, the Asian contagion in 1997 caused unrest throughout the world’s financial markets and more recently the credit crisis in 2007 and 2008 started with the subprime mortgage market in the United States. Financial markets have become more integrated. How does this integration of financial markets cause the crises to spread across many countries? Use the 2008 subprime crisis to explain your response and provide examples.

Answer 1

Over the last few decades, the integration of financial markets has been predominant. This has happened due to the expansion of business activities across the borders by various financial institutions. More and more financial institutions are trying to attract international investors. This has been possible due to the rapid development in technology and internet. While this has helped in increasing the financial transactions across the border, it has also led to reduction in financial controls. Thus, the financial markets have become open markets and they are now beyond the control of any one regulatory body. This has led to increase of financial risks and may also cause financial instability in one or more economies. For example, the sub-prime crisis that took place in US affected all the countries that were related to US either through trade or through financial investments. Similarly, the recent development of Brexit has not only affected Britain and Europe which are the two economies involved in this, but it has affected the economies and financial stability of all the countries that have been involved with them directly or indirectly.