Question

State in details the primary contributors to the financial crisis for both the US and Iceland and include the impact of the banking/financial crisis for both the US and Iceland

Answer 1

Contributors to Financial Crisis of US and the impact of it on the economy-

The financial crisis of US was caused by deregulation in the financial industry. Federal Reserve raised the funds rate as to benefit the economy. Housing prices started to fall down as the supply was more than demand. When the values got out of the hands, banks stopped lending to each other. That was the main reason what created the financial crisis which in turn led to the Great Recession.

Major causes of the financial crisis were International trade imbalances, property bubbles, U.S Government housing policies as a result, lending policies etc. Once the recession started, many attempts were taken to bring back the economy in the good state. Many fiscal policies were launched by the government, and monetary policies of Fed were also taken. Measures were taken to help the customers to recover their mortgage debts. The financial crisis of US 2008 affected the banking sector. Many banks lost their money on mortgage defaults due to businesses shutting down, customer credits etc.

Contributors to Financial Crisis of Iceland and the impact of it on the economy-

In 2008, three of the biggest banks of Iceland got nationalized i.e, Kaupthing Bank, Landsbanki, and Glitnir Bank. The banks defaulted a total of $62 billion of foreign debt. The banks got collapsed and it made the investors move out of the country. This impacted the local currency and the stock market. Businesses started to shut down and the loan interest rates were increased as well. The collapse of the economy was very large in size, considering the size of the country. This in turn led to the crisis of economic depression of 2008-2010.

The government of the country collapsed in early 2009 due to the bankruptcy of the economy. Protesters started to move out on the streets due to increasing unemployment and the high prices.

Europe was also affected by the Iceland’s economic crisis because Iceland's banks were connected with the remaining Europe’s business. The bankrupted banks had also invested in foreign companies. The government was unable to maintain the value of their currency, people suggested Iceland to join the European Union and remove krona as their currency but to adopt euro. But that didn’t happen due to certain clashes.