Causes of the Global Financial Crisis and its impacts Assignment

Causes of the Global Financial Crisis and its impacts - Assignment Example At present, we still face the effects caused by this financial crisis, and much like the previous Great Depression which became a matter of educational importance for students to analyze; a great amount of thought has been dedicated to understanding the factors that eventually led to this economic breakdown. While analyst like Wendell Cox  have distinguished the cause into two broad categories, one being the Profligate lending that led to losses, (Macro-Economics) and the other being the excessive land use regulation exacerbated losses, (Micro-Economics). However, the entire process of the economic meltdown is a series of chain reactions, each policy directly or indirectly leading to the other and causing the system to collapse like a set of dominos. (Report, 2008) If we start at beginning of one of these chains, we find out that the period between 2000 and 2007 saw a marked increase in savings, all of which were available to be invested somewhere. At one point in 2007, the Global Pool of fixed securities increased from $36trillion to $70trillion. (Labonte, 2008) . Investors started searching for new alternatives around the globe where they could apply these savings. This caused a bridge to emerge between these investors and the policy controlling and regulating mechanisms established around the globe. This unauthentication and absence of transparency caused bubble after bubble to be created, each one waiting to burst at any moment. One such target became the housing sector as well, where extensive amount of investments were made and the housing bubble was created, particularly in the US which was soon to meet the expected fate of any economic bubble. To add to this was the fact that mortgage funding was made very easily available for everyone, at low interest rates and with reduction in the standards of regulation previously considered before approving a mortgage loan. This meant that even people who did not previously qualify for these loans (subprime) coul d now afford the expensive houses. The mortgage broker also extracted his benefit from this process. While he is awarded a fee for every mortgage that he passes, these brokers began to push their guidelines limit and award loans to even those who did not meet the qualification to pay them back. The â€Å"prime† borrowers were also able to extract advantage by taking larger loans than they could previously. So when these people were unable to pay back their loans, the mortgage market faced an unaccounted crisis and the series of failure of firms began. (Murphy, n.d.). House prices were skyrocketing, people investing in the housing sector were increasing exponentially, and it was only a matter of time till the bubble burst and this is exactly what happened. The interest rates began to increase, homeowners were unable to pay their mortgage installments, the default on the mortgages grew, and the house prices began to fall. The collapse of the US housing market went on to impact the global financial sectors. The â€Å"Credit Crunch† as it is called, was the loss of confidence by the US investors in the value of sub-prime mortgages and this led to a liquidity crisis. (Referencing). A bailout package was needed. The US Federal Bank invested a grand amount of capital into the financial markets. But nothing could help avoid the crash of the stock markets and the banking sector. The government proposed a $700billion rescue plan, but