The Causes and on Going Effects of the Global Financial Crisis

The Causes and On Going Effects of the Global Financial Crisis

The date as September 15, 2008, when the world’s largest stock brokerage and investment firm, the Lehman Brothers, collapsed. The bankruptcy of the Lehman Brothers gave the world a great shock, but this event was only a small part if the global financial crisis. In fact, more than 10 thousand of the companies had already gone out of business in America within 2007, and the recent news of the bankruptcy of General Motors and the acquisition of Chrysler, both major American automobile companies, told the world that the financial crisis is yet to continue, rather, get worse. Now the ripple of this economic crisis is spreading out to the world, and became “Global Financial Crisis”.

        How did this financial crisis begun in the first place? The causes are many, but the direct and the immediate cause of the crisis lies in the subprime load system in America. A subprime loan is a type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. In other words, it is a loan, mainly a housing loan in this case, lent to people who have a lower credit rating and thus have a reasonable chance of defaulting their payment. Therefore, the interest rate is usually set higher that the other loans. AT first, many people are attracted by the low interest of the subprime loan, but later suffer from gradually risen interest, which is a distinctive characteristic of a subprime loan.

        The subprime loan system first prevailed in the mortgage market in America I the 1990s. The rate started to decrease at the end of the century, but again showed a remarkable growth in 2003, right in the middle of a housing bubble. It was a time when the housing price had been constantly increasing. As the housing price increased, the America civilians began to have difficulty purchasing a house and could also expect to gain profit form the risen price. This lead to subprime loan to became common among American people. Subprime loans were originally made for people with a lower credit rating, thus, the rate of delinquency was usually about 10%, which is 5 times larger than the other housing loans. As the rate of delinquency increased the financial institutions that were accommodating the subprime lenders began to hold back their money. Moreover, the housing bubble began to decline, refinance became ever more difficult and the rate of delinquency soared. Thus, subprime lenders and not to mention its borrowers were met with financial crisis. The bankruptcy of New Century Financial, one of the largest subprime lending institutions in America, it is symbol.

        It would have been better if the financial crisis had stayed within America. However, because of the system that subprime lending has taken, it became a “global financial crisis”. Subprime lending is a security backed system, and its system us scattered around the world so that risk can also be dispersed.

        We can now see how the subprime loan system has caused the global financial crisis, but it is also important that we look into “the cause of the cause”.  In other words, we have to search for indirect causes. The reason why subprime loans excessively increased is because the housing price soared, that is to say, the housing bubble. Then why had housing price made a sudden upturn? What was the cause of the housing bubble?

        One of the reasons goes all the way back to the September 11 Attacks. Because of the attacks, America fell into chaos. In the destroyed World Trade Center, there were many financial institutions, and its amount of damage was inestimable. Thus, the Chairman of the Federal Reserve Board, Alan Greenspan, tried to keep the financial order by greatly cutting interest rates. This policy, first justified by many, is now said to be the hotbed of housing bubble.

        The second reason is the inflow of money to America. At a time when America started Iraq War, the worldwide flow of money was concentrated in particular countries: the oil producing countries and Brazil, Russia, India, China. When the war started on 19 March, 2003, Iraq, a country with the second largest oil reserves in the world, were forced to cease its oil exporting. Thus, the OPEC (Organization of Petroleum Exporting Countries) started to control the price of the oil. As a result, the oil globally increased, bringing excessive profits into oil producing countries. In addition, BRICs, making a rapid economic growth, increased their amount of foreign reserves. This surplus money intensively flower into America and its housing market, a natural result to a country with the largest economic market and in the middle of a war. This formed the structure of the housing bubble.