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Table of Contents

Abstract 2

The Cause of financial crisis 3

4The Markets

Conclusion 5

Reference list 6


As per the economic data, the economic crunch of 2007-2010 had been the very stern financial slump from the time when the Great Depression of 1930 occurred. While the causeis still being discussed, manyconsequencesare apparent and entails the failure of leading companies, significant reduction in assets value, and considerable government involvement globally and a substantial turn down in pecuniary activity. Bothgoverning as well as market-based resolutions have been suggested or implemented to fight the cause and effect of the financial crisis (Borio, 2008).The government, central banks, as well as global companies, instigated numerous strategies inclusive of fiscal expansion, monetary expansion as well as thebailout of theinstitutionto fight the financial crisis. The analysthas pointed fingeron theincorrect credit rating for mortgage-backed securities as well as obsolete financial control policy (Gabriele Giudice, 2011).

The Cause of financial crisis

The United States financial market experienced a remarkable expansion since 1940. The graph below depicts its share in gross domestic product to be rapidly increasing until the latest financial crisis.

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Figure 1. the U.S. financial segment in GDP (1860-2000)

The factors that caused the economic crunch were the overvaluation of US housing market in the year 2006 as well as the afterwards crash. The price of thehouse was driven up by simple credit as well as over-estimation on the notion of thefalse axiom that the price of houses continuously grows. The low initial rates on adjustable rate mortgages as well as low payment needed;lead to short-term estimation with the expectation of selling or refinancing at satisfactory terms. Subsequent to lengthy era of growing home price, the year 2006 lead to decline in price of home as well as interest rates rise leading to the poor re-funding situation. Quick growth in default activities was experienced as theprice for homes failed to grow as anticipated as well as mortgage were incapable of refinancing upon the expiration of initial rates (Gregoriou, 2012).

There was easy credit in U.S in the early years leading to economic crunch since substantial foreign cash inflows permitted federal researchers to maintain low rates. Many inflows of overseas currency were realized from prosperous Asian market as well as the oil-producing countries. The low levelswere worsened by the latest financial instrument like the collateralized debt obligation that provided banks extra inducement to create numerous kinds of advances existing to customers. As the threat linked with credit reimbursement were passed through to the investors, itturns to be simpler for customers to get advances as well as money owing grew to anexceptional level.Theexpansion in the market for these instrument as well as lead to growth in investment by foreign investors, and as a result gainsexposuresto, the U.S housing market (Hunter, 1999).

The Markets.

In June 2008 statement, thepresident as well as manager of the NY Federal Reserve Bank Timothy Geithner, who in the year 2009 turn to be secretary of U.S treasury, placed substantial culpability for the freezing of credit markets on a “run” on companies in a “parallel” financial institution system. The firms, financial investmentinstitution as well as hedges financing in specific, turn to be progressively substantial as a source of loans in the financial system but, were not matter to similar supervisory management that was practical to depository financial institution. Moreover, these entities were susceptible since they were on short-term loan in the liquid market so as to finance the purchase of long-term, non-liquid as well as arisky asset (Michel Chossudovsky, 2010).

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Figure 2. Long-term history of the TED spread

The TED spread of an observed loan peril in the whole financial system, prickled up in July 2007, continued to be unpredictable for a year, then prickled even much advanced in September 2008 to reach a score of 5.16% on October 2008 as depicted in the figure 2 above.

Effect of fixed Money Wages and Price and its Impact on fiscal Austerity policy

Where there fixed money and wages, there will be a decline in the adjustment from the demand impertus of a fiscal austerity policy which would lead to stunted and insufficient in such a way that the economy might be stunted during recession. The impact of this is that, a basis for policy involvement the central bank to ensure that there is a reduction in the rate of output gap which would lead to an aggressive expansionary monetary policy also considered as shifting the AD rightward as observed in the graph below. Provided that the government policy reduces the demand impertus, there is possibility of intervention by policymakers.

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Since 1988, worldwide capital policy have been enacted by Basel commission on bank control, an association on controllers placing reliance on national establishmentsto execute its principles. The 2004 Basel II Accord, an improved adaptation of the previous principle set in Base lII in 1988, is implemented by many European financial institutions. In conclusion, the rules guarantee that the greater the risk to which the financial institution is exposed, the greater the amount of capital required to protect its creditworthiness.

Reference list

Borio, C. 2008. The Financial Turmoil of 2007-?: A Preliminary Assessment. London:CengageLearning.

Gabriele Giudice, ‎‎S. 2011. UK Economy: The Crisis in Perspective. New York: CengageLearning.

Gregoriou, G. 2012. Reconsidering Funds of Hedge Funds: The Financial Crisis. London.

Hunter,C. 1999. The Asian Financial Crisis: Origins, Implications, London.

Michel Chossudovsky, M. 2010. The Global Economic Crisis: The Great Depression. New York.