Global Financial Crisis – What caused it

and how the world responded

Posted by Canstar Research on 23/11/2012 at 8:21 am

The credit crunch

The global financial crisis (GFC) or global economic crisis is commonly believed to
have begun in July 2007 with the credit crunch, when a loss of confidence by US
investors in the value of sub-prime mortgages caused a liquidity crisis. This, in turn,
resulted in the US Federal Bank injecting a large amount of capital into financial
markets. By September 2008, the crisis had worsened as stock markets around the globe
crashed and became highly volatile. Consumer confidence hit rock bottom as everyone
tightened their belts in fear of what could lie ahead.

The sub-prime crisis and housing bubble

The housing market in the United States suffered greatly as many home owners who
had taken out sub-prime loans found they were unable to meet their mortgage
repayments. As the value of homes plummeted, the borrowers found themselves with
negative equity. With a large number of borrowers defaulting on loans, banks were
faced with a situation where the repossessed house and land was worth less on today’s
market than the bank had loaned out originally. The banks had a liquidity crisis on their
hands, and giving and obtaining loans became increasingly difficult as the fallout from
the sub-prime lending bubble burst. This is commonly referred to as the credit crunch.

Although the housing collapse in the United States is commonly referred to as the
trigger for the global financial crisis, some experts who have examined the events over
the past few years, and indeed even politicians in the United States, may believe that the
financial system was needed better regulation to discourage unscrupulous lending.

The global financial crisis enters a new phase

The collapse of Lehman Brothers on September 14, 2008 marked the beginning of a
new phase in the global financial crisis. Governments around the world struggled to
rescue giant financial institutions as the fallout from the housing and stock market
collapse worsened. Many financial institutions continued to face serious liquidity issues.
The Australian government announced the first of it’s stimulus packages aimed to
jump-start the slowing economy.

The U.S. government proposed a $700 billion rescue plan, which subsequently failed to
pass because some members of US Congress objected to the use of such a massive
amount of taxpayer money being spent to bail out Wall Street investment bankers who
some people may have believed could be one of the causes of the global financial crisis.
By September and October of 2008, people began investing heavily in gold, bonds and
US dollar or Euro currency as it was seen as a safer alternative to the ailing housing or
stock market.

In January of 2009 US President Obama proposed federal spending of around $1 trillion

in an attempt to improve the state of the financial crisis. The Australian government also
proposed another stimulus package, pledging to give cash handouts to tax payers, and
spend more money on longer-term infrastructure projects.

Australia’s response to the global financial crisis – the first stimulus

package

Australian prime minister Kevin Rudd and

Treasurer Wayne Swan delivered their first budget in response to the global financial
crisis, with the main objective being to fight inflation – a major problem in the local
economy at the time.

In October 2008 the Rudd government announced that it would guarantee bank
deposits. With the economy facing a recession, an economic stimulus package worth
$10.4 billion was announced. This included payments to seniors, carers and families.
The payment were made in December 2008, just in time for Christmas spending, and
retailers predominantly reported strong sales. The first home buyer’s grant was doubled
to $14,000 for existing homes, and tripled to $21,000 for new homes.

The automotive industry was also given a helping hand, as several major lenders had
withdrawn from the market completely, leaving banks to fill the gaps in lending.

The crisis continues – a second stimulus package is announced

A second, even larger economic stimulus package was announced by the Australian
government in February 2009. $47 billion was allocated to help boost the economy:

 $14.7 billion for schools

 $6.6 billion for 20,000 new homes
 $3.9 billion to insulate 2.7 million homes
  $890 million for road repairs and infrastructure
 $2.7 billion in small business tax breaks
 $12.7 billion for cash bonuses: $950 for every Australian taxpayer who earned
less than $80,000, to be paid out in March and April 2009

Are we really immune to the worst of this crisis?

Many experts had commented that the Australian economy was somewhat more
insulated than other countries from the sub-prime issues surrounding the United States,
and although Australia has not suffered as badly as some nations, the affects of the
global financial crisis are very real and may yet deepen. The Australian housing market
has slowed. What began as a relatively localised issue in the United States has had a
massive flow-on effect worldwide, and it is still not known how long it will take for the
world economies to recover.