Global Financial Crisis (2008)
Development and Effects of Global Financial Crisis (2008)
Gokay (2014) argues that the main trigger that caused the financial crisis of 2008 was the burst of the United States housing bubble that had reached its optimum in 2005-2006. During the last decade, the government had prompted banks to provide mortgages to people that were initially viewed as bad credit risks. The prices of the houses kept rising and this made lending institutions think that price trend would continue. They figured that if people were unable to keep up with the mortgage rates, their houses would be repossessed and sold at vast profits. The easy availability of mortgage led to an increase in demand for housing. As the economic growth slowed in America, mortgage holders started defaulting in payments since they could not afford the ever-increasing interest rates. Investors who were responsible for buying these mortgages through mortgage-backed securities realized that the value of their properties was dropping sharply. Consequently, the mortgage lenders realized that they could not make enough from selling over a million houses from mortgage defaulters. The investment banks that had lent out to the mortgage lenders also realized that they would be facing losses in billions of dollars.
As a result, financial institutions all over the world stopped lending each other since they feared that they could not get back their money. This halted lending all over the world leading to the credit crunch. The credit crunch resulted to economies all over the world immobilizing due to the absence of borrowing and lending, which is the heart of modern economic activities. Governments tried to intervene by pouring billions into the private sector hoping that the recipients of these funds would start borrowing and lending funds once again to reinstate the economic activity of the world. However, this posed a danger as the nationalized banks took all the debt, which was often bigger than the country’s GDP. Overall, Gokay (2014) suggests that the dependency of the whole world to the economic activity of the United States ensured that most countries all over the world felt some effect of the global financial crisis of 2008.
Effects of the 2008 global financial crisis
According to major economic publishing houses, the stock market index for emerging markets lost about 55% while the developed markets lost around 42%. The damage was so great that this historical event could only be compared to the 1930s market crash. Ten million hard working American citizens also lost employment as numerous companies went under. The unemployment rates rose to 6.5%, which was the highest rate for the past fourteen years (Gokay 2014). Over five million Americans lost their homes while many others defaulted in their payments. In the third quarter of 2008, over 20% of homes mortgage value dropped lower that what the houses were worth in mortgage (Gokay 2014). This crippled the backbone of the economy since real estate was the sole investment that had propelled numerous generations of Americans to middle class.
Gokay (2014) states that the world financial crisis affected aid issued to developing third world countries. This occurred because of the federal government reduced aid to their banks after the GDP of major worlds super powers drastically contracted in 2008 and 2009. Numerous states in the United States also had to cut funding by 3.8% in 2009 and another 5.7% in 2010. This affected areas like higher education funding, public assistance programs, and education. This may have affected the quality of students released in the workforce both in America and in regions all over the world.
Since governments had to support their failing economies all over the world, America in specific lost $14 trillion, which was equivalent to an entire year worth of economic activities. The persistent losses of the years 2008 and 2009 led to cut spending costs in the public workforce as well as halt of expansion plans in many businesses and worker compensations. Research conducted in 2009 revealed that wages decreased for around 70% of workers in the job market due to inflation (Gokay 2014). This meant that the American people had to buy fewer houses and postpone starting families. Unfortunately, the low income earners were the worst hit as financial reports released in 2009 indicated that the richest 1% of the world increased their wealth by 2.5%. It became even harder for the normal citizen to secure a loan as loan payments became even harder to pay.
References
Gokay, B. (2014). The 2008 world economic crisis: Global shifts and faultlines. Global Research. Retrieved from: http://www.globalresearch.ca/the-2008-world-economic-crisis-global-shifts-and-faultlines/12283
