Specific causes of the 2007-2009 global financial crisis
The 2007 – 2009 Global Financial Crisis, popularly known as GFC, was a period of stressful and straining in the global banking system and financial markets. The leading cause of the 2007 – 2009 global financial crisis started in the U.S. housing market, which spread to the rest of the world due to the linkage of the global financial system.
The crisis is deemed to be worse since the 1930's Great Depression because the recovery was prolonged and had long-lasting effects. The housing market caused by the subprime mortgage crisis, where there was an unregulated mortgage market leading to an asset bubble burst in the housing industry. The low mortgage rates made people invest a lot, hoping to reap from the increased home values in previous years. Freddie Mac and Fannie Mae government entities advanced huge loans even to people who do not qualify for the loans. Most people invested in the housing industry hoping to sell the houses, but it led to a downturn; hence, becoming a financial catastrophe when the assets could not be sold. Economists did not foresee that the prices would fall, leading to massive losses. The homeowners could not refinance the mortgages leading to a severe global financial crisis (Bayoumi 2017).
Delegate your assignment to our experts and they will do the rest.
Secondly, the housing sector mortgages led to banks, investors, and other financial institutions to increase their lending at a lower rate. The borrowers were unable to repay the loans when the economy malfunction making the investors and financial institutions incur huge losses due to over-borrowing. Furthermore, the lending was not regulated, and there was no security or collateral for most of the loans, which made it difficult to be recovered (Bayoumi 2017). Due to reduced repayment of loans, most financial institutions laid-off employees to remain afloat while smaller financial institutions collapsed.
Thirdly, the 2007 – 2009 global financial crisis was caused by policy and regulations errors that led to laxity. For example, there were inadequate regulations of financial institutions that provided complex and opaque facilities to the investors. Lack of proper rules hampered the financial market, significantly leading to fraud and an inability to assess and evaluate the ability of the borrower to repay. The borrowers engaged in fraud where they overstated their incomes or revenues and investors over-promising their financial safety and stability on MBS products. The bad loans extended during the boom, not only in the mortgage sector, brought down the financial system. The bottom line is that the government failed to instill order by ensuring regulations put in place are adhered to worsen the situation (Bayoumi 2017).
Compare and contrast the impacts of the 2007-2009 global financial crisis on this selected economy with the effects on the U.S. economy.
Germany and the United States of America's impact on 2007 – 2009 global financial had a severe negative effect on the economy. In both countries, the financial institutions suffered losses, and their value dropped drastically. Also, many citizens of both countries lost their jobs and struggled to get well-paying jobs after the crises. With job losses, the government's revenues dropped drastically due to reduced taxes. The living standards of most people were affected because they could not meet their daily obligations to their families, such as school fees payments, rent payment, and provision of other necessities. Besides, the housing sector was hard-hit in both countries because most of the mortgages were not repaid, and the value of houses declined drastically because no one was buying them in the market. Moreover, the stock market plunged to the lowest points in the history of both countries (Murau 2017).
In contrast, America suffered more than Germany; for instance, all industries were affected while in Germany, the financial sector was mostly hit. However, it spilled over to other industries but not as the United States of America. Furthermore, some American banks collapsed, such as U.S. Investment bank Lehman Brothers, unlike Germany, whose financial sector was affected, but no bank collapsed. Moreover, both governments restructured and bailed out most of the lending institutions that were affected by unregulated mortgage lending effects. For instance, in America, the government helped Freddie Mac and Fannie Mae to stabilize while in Germany, the largest lender, Deutsche Bank, was bailed by the government because it was hard-hit by the crisis. The other affected biggest banks in America were JPMorgan Chase, where its assets decline to 1.5 trillion from 2.5 trillion, and Bank of America assets dropped to 1.7 trillion co pared to 2.3 trillion before the crisis. The companies that were affected were either Merged or acquired, depending on the financial situation. Additionally, the monetary and fiscal authorities in both countries (USA and Germany) opted to relax the administrative procedures and requirements to negate the adverse effects of the financial crisis affecting micro and macro-economic policies (Murau 2017). For instance, they reduced the reserve requirement ratios, infrastructure spending, grants, and ceiling and floor caps.
The country’s government respond to the crisis and the current economic situation within the world economy.
In Germany, the government responded by regulating the banking sector. The government, through the lawmakers, passed and adopted new regulations governing the financial institutions in the country. The rules were not there before, and they are meant to stabilize the sector. The government offered shots and guarantees to cushion many banks that were on the verge of collapsing. The German Chancellor Angela Merkel and then-Finance Minister Peer Steinbrück tightened the banking sector. They made sure that the customer's bank deposits and investments were safe to avoid future mistakes encountered during the 2007 – 2009 global financial crisis.
Furthermore, the North-Rhine Westphalia regional government bailed out the WestLB Bank. At the same time, SachsenLB was taken over by Baden- Württemberg state because they were affected by subprime mortgages that were not regulated. The German government cushioned its economy by injecting capital in sectors of the economy that are crucial and severely hit by the crisis. Additionally, the government, through fiscal and monetary authorities, monitored and assessed the operations of the financial institutions regularly (Huber 2018). The process is to know their state and provide well-informed decisions on the weaknesses and areas of improvement.
Germany's economic situation recovered and doing well, like other economies. The financial position of the country is currently stable, and more regulations that are stringent have been adopted to reduce the impact of future crises. All the sectors of the economy, such are financial, agricultural, industrial, pharmaceutical, small scale businesses, and other industries, are adequately managed and regulated, and they recovered fully from the crisis (Huber 2018). From this, Germany's economy is stable, like many developed countries, unlike the developing countries' economy.
References
Bayoumi, T. A. (2017). Unfinished business: the unexplored causes of the financial crisis and the lessons yet to be learned . Yale University Press.
Huber, K. (2018). Disentangling the effects of a banking crisis: evidence from German firms and counties. American Economic Review , 108 (3), 868-98.
Murau, S. (2017). Shadow money and the public money supply: the impact of the 2007–2009 financial crisis on the monetary system. Review of International Political Economy , 24 (5), 802-838.
