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?

Essay in 1200 words.

Thanks

Answer 1

The American real estate crash and collapse  in 2008 2009 was due to a number of reasons.

The causes of the United States housing bubble can be attributed to home purchasers, Wall street , mortgage underwriters, mortgage brokers, investment bank, rating agencies ,unregulated derivatives, low mortgage interest rates ,low short term interest rates ,overvaluing of stock market and  relaxed standards for mortgage loans .

Government policies like excluding housing  investment from capital gains made it very attractive to people to purchase expensive homes and second homes .

Deregulations like adjustable rate financing was granted permission that contributed to easy credit which fueled the crises that is the real estate housing bubble.

The crisis was also sparked by reckless government policies , that is federal mandates for eg low income and minority loan committments to promote affordable housing which contributed to the crisis

Low interest rates for a very long time by the federal reserve also led to the crash along with risky mortgage products and lax lending standards ie credit default swap , collateralised debt also endangered the real estate collapse.

It became global in the sense that there was a huge impact on home valuations, home builders, mortgage markets,home supply retail outlets,hedge funds held by instituitional investors, foreign banks.

A series of regulatory proposals have been announced to stop the spread of such kind of economic contagion and prevent reoccurence .These proposals address consumer protection ,executive pay,regulating shadow banking system and derivatives ,bank capital requirements .

The proposals include nationalising insolvent banks,early warning system to mitigate risk,maintaining sufficient contigent and necessary capital by financial institutions, minimum down payment for home mortgages,break up institutions to limit risk, limiting leverage of financial instituitions and granting more power to Federal reserve.