What is the global financial crisis and its impact on the global economy

MARKET_WATCH Economy

The Global Financial Crisis was a widespread economic downturn that began in 2008 and resulted from the collapse of the housing market and investment banks.

 

When the financial system or the economy as a whole undergoes a rapid and large decline, it is said to be in a financial crisis. Financial assets like stocks, bonds, and real estate often see a sharp and significant decline in value during financial crises. They can also be identified by a decline in credit availability and a loss of faith in financial institutions like banks.

Related: DeFi vs. CeFi: Comparing decentralized to centralized finance

 

Financial crises can be caused by a variety of factors, including:

  • Overleveraging: When people, businesses, and governments take on excessive debt, they put themselves at risk of a financial collapse.
  • Asset price bubbles: When the cost of an asset, such as a home or stock, rises quickly, it can lead to a financial crisis when the price falls sharply.
  • Bank runs: When enough customers attempt to withdraw money from a bank at once, the institution may become insolvent and shut down, triggering a financial crisis.
  •  
  • Financial institution mismanagement: Financial institutions that are poorly managed may become bankrupt or fail, which could trigger a financial catastrophe.
  • Economic recessions: A financial crisis can result from an economic recession, which is defined by diminishing economic activity and growing unemployment.

This article will discuss the global financial crisis (GFC) of 2007-08, its main causes, and how the financial crisis impacted the economy.

 

What is a global financial crisis

 

The global financial crisis of 2007–2008 was a major financial crisis that had far-reaching impacts on the global economy. A housing market bubble, unethical subprime mortgage lending practices, and the overproduction of sophisticated financial products like mortgage-backed securities all contributed to its cause.

The subprime mortgage market in the United States, specifically, served as the catalyst for the 2007–2008 global financial crisis. Loans with risky lending terms and high interest rates were given to borrowers with bad credit records under the phrase "subprime mortgages." A housing market bubble in the US was brought on by the rise in subprime mortgage loans and the subsequent marketing of these loans as securities.

 

Many borrowers were unable to make mortgage loan payments when the housing bubble eventually burst and prices started to plummet, which sparked a wave of foreclosures. The value of mortgage-backed securities decreased as a result, and the global financial system experienced a liquidity crisis, which set off the GFC of 2007–2008.

 

Due to the crisis, home prices significantly dropped, there were a lot of foreclosures, and the credit markets were frozen. This in turn sparked a financial crisis that required government intervention and bailouts, as well as a global recession. The crisis' effects were felt on a global scale, causing widespread economic distress as well as a fall in employment and economic growth.


 

 

Source : [What is the global financial crisis and its impact on the global economy](cointelegraph.com/news/what-is-the-global-financial-crisis-and-its-impact-on-the-global-economy) by Cointelegraph By Guneet Kaur - 29Cointelegraph.com News by Cointelegraph By Guneet Kaur / February 05, 2023

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