CAUSES OF THE FINANCIAL CRISIS 2007 – 2009

The problem under discussion is the causes of Financial Crisis 2007-2009.
The assignment opens a short pre-crisis history. From the 2000s the USA became the largest debtor of a world managing current account balances, which led to the global financial crisis in 2007-2008. ...

List of illustrations
1. Introduction
2. General representation of the factors leading to Crisis
2.1. Chronology of the Financial Crisis
2.2. Main figures
2.3. The Government’s response to the Financial Crisis
3. An essence of the Financial Crisis
3.1. Bank failures
3.2. Changes of income
3.3. Increase in Public Debt
3.4. Global forces behind the Crisis
4. Conclusion
Annex
Bibliography

In the middle 2007 a lack of management mechanisms of globalization process made cracks in the stability of economy. The inflation was rising from year to year and in 2007-2008 was extremely high. That time policy makers were not able to fix macroeconomic balances that led to the high prices on the livelihood. The regulation started only in 2008 but some events happened with institutions on Wall Street in September 2008 that shocked the world and altered radically the fate and course of our globalized economies altogether.
The crisis started in the USA in 2007 with the sudden cutting of several funding and brought about the changes in economy of the whole world.
The financial rate was falling down till the point “zero”, the inflation and prices were rising, the position of dollar wasn’t s uch important anymore as before.
The Financial Crisis 2007-2009 was caused by the line of causes including bank failures, changes of income, increase in public debt, a lot of loans and some global consequences.
The author makes a conclusion that the main cause of the crisis was the combination of the credit boom and house bubble.

List of Figures
List of Tables
1 Introduction
The problem of the assignment is the Financial Crisis 2007-2009 and the main causes of it.
Over the last years the world economy has changed a lot in accordance to the demands of globalization.
In the 1980s there were several debt crisis concerning middle- and low- income developing countries. The 1990s were marked by reintegration into the international capital markets as emerging market economies.
The global saving glut together with the special status of dollar in monetary system led to the needs in macro imbalances.
A lot of loans on easy conditions and savings of American economy ended in the housing and credit boom and the sub-prime mortgage debacle.
The heart of the global capitalist system had crashed that led to the first Financial Crisis of the 21 century.
The purpose of the assignment is to study the Financial Crisis 2007-2009.
The aims of assignment are the following:
1) to clear out the background of the crisis;
2) to mark the main figures of the crisis;
3) to characterize bank failures and changes of income during 2007-2009;
4) to describe the government’s responses to the crisis in different countries;
5) to find out the main causes of the Financial Crisis 2007-2009.
In the process of work on the assignment the literature on question was used, studied and analyzed by methods of synthesizing and analyzing the information.
The problem was previously widely studied by Belke, A., W. Orthand R. Setzer, Cali M. and I. Massa and D.W. te Verde, Laeven, Luc, and Fabian Valencia, Miller Marcus and Lei Zhang, Nissanke Machiko, Howard Stein, Senbet Lemma.
2 General representation of the factors leading to Crisis
2.1 Chronology of the Financial Crisis
The Financial Crisis was preceded by a long period of low risk premiums, rapid credit grows, abundant liquidity etc. There were some similar events earlier in the history of the world economy. For example, the same situation happened to Japan and the Nordic countries (1990s), the Asian crisis took place that time too.
However, today it is said that the global crisis 2007-2009 was the consequence of the Great Depression of the 1930s.
The global crisis started in the middle of August 2007 with the sudden cutting off of funding to several financial entities.
The Federal Reserve reduced the discount rate in order to give the opportunities for banks to regulate the situation1.
During the previous year (from June 2006 up to August 2007) the rate was stable at the point of 5.25%, but it highly changed in a short period from August to September 2007. The first reduction was by fifty basis points. In late January 2008 it reached 3%.
In the middle of March 2008 the problem concerned one of the biggest banks of New York, Bear Stearns. Federal Reserve prevented it from failing by providing an emergency loan and assuming the credit risk as a result of which the bank was bought by JP Morgan Chase. In several days rate target was down to 2.25%. This was the first period of the crisis.
From April to September 2008 the rate was 2%, the economy was declining, bit the situation still held non-abnormal. The second period ended by the Lehman crisis in September 15, when Lehman Brothers became out of business. Thus the condition of the crisis went to calamitous.
In October 2008 the Fed cut the target funds rate to 1% and in December it was zero.
This situation was held for some time until credit began flowing again.
The Financial Crisis 2007-2009 spread worldwide and made a lot of damages to the economy. It affected the markets of Europe, Asia and the USA. In spite of the fact that Asian banks were the strongest, Asia also could not escape the effects of the crisis.
2.2 Main figures
The global Financial Crisis started in 2007 and affected baking systems of many countries all around the world.
It was characterized by a complex interaction of government policies, evolution of the market and undue risk.
In the European Union central banks took measures to regulate the situation by raising deposit guarantees and releasing 2% of GDP2.
Figure 1. Log-GDP around crisis period
Figure 2. Construction activity and current account position
The financial shock hit all the countries in different ways. Thus, in the United Kingdom, France, Ireland, Spain and the Baltic countries the prices of housing activities increased a lot. Germany, Austria and the Netherlands exposed to the sharp contraction of world trade. Countries with large financial centers exposed to financial turbulence (Luxembourg, Ireland and the UK)3.
Figure 3. The decline in world trade during the crisis of 2008-2009
A rise in the extent of protectionism and a symmetric exchange rate adjustments wrecked havoc on world trade and international capital flows. The same situation was observed in the USA in 1929-30s, but if that time it had turned into a global depression, this crisis tended to be blander.
Figure 4. Monetary Expansion over the period 2007-2009
Change in monetary base in percentage points of GDP between the peak and its level one year before the crisis. Horizontal lines denote the medians by country groups. All (old): all countries; High income (old): high income countries4.
During the period from 2007 to 2009 the rate of Investment reduced by 42.2%, all the activities fell down.
Data 2007Q4-2009Q2
Output
-4.99%
Consumption
-3.86%
Investment
-42.2%
Hours
-9.52%
Wages
6.94%
MPL
↑
Table 1. Financial crisis data5
Thus the Financial Crisis 2007-2009 caused a lot of problems in the economy and lead to bad consequences.
2.3 Bank failures