global financial crisis

Topics: Macroeconomics, Monetary policy, Recession Pages: 2 (463 words) Published: February 13, 2014
The 2008-2009 global financial crisis started from the American Housing. It rapidly spread to other economic sectors and shortly infected Europe and Japan, and also influenced other countries with respect to their dependence on America’s economy. How did the global financial crisis start?

Banks and financial foundations invested in housing for gaining more profit. Housing Banks in lending to customers to greedy more profits did not observe criteria relating to customers financial ability and their repay power. Later, banks for covering loan risks, increased interest rates, borrowers who were not able to pay loans, decided to sell their houses. According to high interest rate, they did not find customer. So home prices start to fall and the bubble burst. By bursting the bubble, borrowers did not pay their loans and banks faced to empty houses. Thus banks failed one after another and crisis spread to other parts of America economy and Recession started

Similarity between2001 and 2008-2009 global financial crisis One similarity is that consumption has actually decreased in both recessions. As the fall in bank capital reduces; consumption, investment and housing have decreased the real wealth of households. Thus, people feel poorer and spend less. The sharp decrease in consumer spending and business confidence that resulted from the financial crisis, reflected by falls in real personal consumption of 3.8% (3rd Qtr 2008) and 4.3% (4th Qtr 2008) for the United States economy, led to significant shift to the left of The IS curve in an IS-LM model. The result in the short-run was a substantial decrease in output, output would have declined to Y1 as shown below.

Another similarity is the consequences. The U.S. recession of 2001 caused 1) 2.1 million people lost their jobs, as unemployment rose from 3.9% to 5.8%. 2) GDP growth slowed to 0.8%, (compared to 3 9% average annual growth during (compared to 3.9% average annual growth during 1994-2000). On...
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