Free Essay: The Global Financial Crisis of 2008- Causes and Effects

The 2008 global financial crisis is said to be the worst financial problem to have faced the world since the Great Depression of the 1930s. The financial crisis was preceded by an economic boom of some sort and high investment levels. In fact, prior to this crisis, many economists had voiced their concerns over the amount of credit flow in the US as well as investments. So what really caused this financial catastrophe and what effects did it have on America and the world at large?

Causes of the Global Financial Crisis of 2008

Economists and many experts have debated the causes of the 2008 global financial crisis ad infinitum. This is because it was one of the worst financial disasters to be experienced whose effects are still being felt to date. Amongst the major causes that have been unearthed include:

• Real Estate boom. The real estate market has been at the heart of the global financial crisis of 2008 for a good reason. Prior to the crisis, there was a real estate and mortgage boom with many people buying houses only to sell them at a higher price and gain good profits. Despite the risk, the earlier investors in this business became so rich so that everyone wanted to be part of this business. However after a while, the prices of the houses began to go down and instead of making massive profits, those who had invested in the business made losses or even failed to find buyers for the properties they had bought.
• Easy credit access. With the mortgage boom, many credit lenders became generous. From banks to government owned enterprises and private lenders, credit was easily available. This is because most private banks lowered the standards of borrowing in order to capture the huge market of real estate investors. As a result, many credit unworthy individuals had access to loans and mortgages. When the property prices fell, most banks and credit facilities went down too. All the credit flow was tightened and this made it impossible for individuals to get financial help.
• Commodity prices. Some of the economists have attributed the global financial crisis to the hike in essential commodities such as oil. The rise in oil prices had a ripple effect in all the other commodities and soon most consumers could not afford essential purchases. This in turn affected the producers and employees.

Effects of the Global Financial Crisis of 2008

• The global financial crisis of 2008 resulted in bankruptcy for many credit facilities. This is because they had lent out so much money and mortgages without saving up capital for hard times. Additionally, many companies that had invested in real estate also went bankrupt.
• There were many foreclosures because people could not afford to pay the mortgages. Additionally, most of the credit facilities tightened the rules for borrowing making it difficult for those facing financial problems to get any sort of help.
• Bailouts and mergers. The government had to come to the rescue of many longstanding banks by giving them bailouts. These handouts saved the banks that benefited from the bailouts. Those that did not get the bailouts had to merge together to avoid collapsing.
• There were also high rates of unemployment because consumers could not afford to purchase most commodities. This in turn affected production rates and instead of making losses, companies begun producing less and let go of most of their employees.

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References

http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article

http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308

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