To understand the main causes of global financial crisis of this decade we need to first understand few characteristics of Globalization mentioned below – To economically boost international trade, capital flows and global financial systems. To increase the number of multi-national corporations to increase global economy. To rapidly foster technological development and to boost outsourcing activities. To ease communications and lead access to Trans border data. (Web 1) There were many causes for the current Global financial Crisis.
The credit crunch or the financial crisis started when the US government started lending loans at cheaper interest rates to people like sub-prime brokers who usually are not eligible to get loans. The loans in-turn were securitized or converted to investments. Securitization involves turning an asset, such as mortgages or credit card debt, into a financial instrument that can be traded. Regular house-holds had now turned to be investors and security issuers, which in turn led to a very complex trading system. This complex system was lucrative only initially and was highly instable which led to the downfall of financial institutions. (Gerald F. Davis (2009), These securitized products were combined with other collaterals to attract more investors which gave a perception of mitigating risk at very low interest rates; however unfortunately interest rates rose steadily and this lead the sub-prime brokers to default. This was the prime reason where the financial downfall started. All the financial institutions were under serious monetary deadlock, because in the first place when borrowers defaulted, they were not able to pay back the principal amount, forget interest on principal. At the same time the housing and real-estate industry was on a boom. Borrowers who wished to purchase home were easily given loans. Massive residential re-construction took place, however borrowers as mentioned started to default and were unable to re-pay their debts and defaulted. (Web 2) The above two factors were mainly responsible for the financial crisis, or rather led to fuel and ignite the recent credit crunch.
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The banking sector also played a significant role in the financial crisis, with corporate and investment banking, bringing both significant profits but ultimately also bringing billions of pounds in toxic debt and trillions in banking bailouts around the world.( ACCA Global- Web 3). This strategy adopted by the retail banking activities to reap more profits by providing loans to people with low creditability (low credit-score), which proved to be a costly affair to the banks when customers defaulted. The UK and US markets is largely relying on consumption (personal debt) with very low savings and huge debts. Considering the current financial turmoil, savings has become a distant dream and people are currently become debtors because of their ways of expenditure.
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