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Table of Contents
Introduction.........................................................................................................................................2
Defining A Global Financial Crisis....................................................................................................2
The Global Financial Crisis of 2009...................................................................................................2
Impact of Global Financial Crisis of 2009 on US..............................................................................3
Short Term and Long Term Implications of Global Financial Crisis of 2009................................3
Timeline of the Events of Financial Crisis of 2009............................................................................4
Policies Taken by Governments and International Organizations..................................................4
Conclusion............................................................................................................................................5
References............................................................................................................................................6
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Introduction
The financial system of the world is working on the basis of collaboration between the countries and
every country has its benefits vested in that system. Globalization has changed much of the financial
system of the world and the information generated in one part of the world can quickly influence the
financial markets all over the world. Hence, the stable working of the financial system of the world is
desired by each and every stakeholder of the economy. This brief essay takes a view on the factors
that cause an unrest in the working of the global financial system and leads to a global financial crisis.
The essay contains a brief overview of the Global Financial Crisis (GFC) of 2009 and taking the case
study of United States as an example. The short and the long-term implications of the crisis along
with the policies taken by the world governments to mitigate the effects of the GFC have been
elaborated in this regard (Tran, Hoang & Tran, 2018).

Defining A Global Financial Crisis

The Global Financial Crisis of simply a financial crisis is a situation which affects several countries at
the same point in time. It is a period of several and severe financial difficulties which are faced by the
companies, consumers, markets and institutions at the same time. The faith in the financial system is
lost and financial giants stop lending to each other (Tran et al., 2018). The traders on the other hand
also stops the trading of financial securities. Due this situation, majority of the business organizations
suffer. The worthiness of financial assets also becomes a question of debate in times of a financial
crisis. The banks also stop the lending process and then demand for the early settlement of the loans in
the given case (Tran et al., 2018).

The Global Financial Crisis of 2009

The GFC of 2009 refers to the period of extreme stress in the financial markets of the world and also
in the banking sectors. The timespan of the crisis was between 2007 and 2009 (Mehdian, Rezvanian,
& Stoica, 2019). During the period of crisis, there was a downturn in the US housing sector which
performed the role of a catalyst for that crisis. Consequently, the other countries linked to the US
financial system were also influenced in the given case. Many of the banks around the globe suffered
major losses and had to be bailed out by the governments to avoid potential bankruptcies. The results
of the crisis on job market were also worse as several thousands of employees lost their jobs. The key
reasons which were outlined as the causes of the GFC 2009 included (DesJardine, Bansal & Yang,
2019):

 Due to favourable economic conditions, investors took excessive risk.

 Increased level of borrowing by the banks and the investors.
 Errors in regulations and the policy.
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Impact of Global Financial Crisis of 2009 on US

The global financial crisis left its marks on the global economy but the case of US has been discussed
in this section in detail. When the GFC unfolded, the housing prices in US fell and the repayments
were missed by the borrowers[ CITATION RBA20 \l 1033 ]. Hence, the housing prices performed the
role of the catalyst and the borrowers were unable to payback their loans in the given case. Housing
prices were increasing in the US around mid-2006 and the supply of the newly built houses in some
areas was increasing. In case of United States, the loan repayments were considered sensitive in case
of housing sector as the percentage of households in US with large debts increased during the period
of boom[ CITATION RBA20 \l 1033 ].

The financial system was also in stress and it was that stress was clearly visible from mid-2007. The
large losses were incurred by the lenders as the borrowers were missing the repayments and the
houses were repossessed thereof. The repossessed houses were to be sold at a price less than loan
balance. Hence, the impact on Mortgage-Backed Securities (MBS) was eventual as people stopped the
trading of such securities[ CITATION RBA20 \l 1033 ].

The global financial crisis not only affected the US Economy it also had its spill over effects on other
countries. During the boom period, the foreign banks were actively investing the housing market of
United States and US Banks were also operating in several other countries. This also included the
trading of Mortgage-Backed Securities in the given case and these channelized transactions become a
problem for the financial institutions involved and a spill over effect was observed [ CITATION
RBA20 \l 1033 ].

In addition to that, the failure of large financial firms created a panic situation in the market. The
crisis was at peak in 2008 when the US financial firm Lehman Brothers collapsed. It triggered a
panic-like situation in the market as other firms working closely with the Lehman Brothers were also
on the brink of collapse. Soon after that the investors started to withdraw their investments from the
banks and the markets were becoming practically dysfunctional in the given case[ CITATION RBA20 \l
1033 ].

Short Term and Long Term Implications of Global Financial

Crisis of 2009
As mentioned earlier, that the global financial crisis of 2009 deteriorated the global financial markets
and the systems. The implications of a financial crisis can be divided into two sections, the short-term
and the long term. The short-term implications of GFC of 2009 included (Cukierman, 2013):
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 Loss of household income in countries affected from the financial crisis.

 Firms were filing for bankruptcy for example Lehman Brothers.
 Unemployment issues and the problems associated with it (health and psychological
problems).
 Due to lower tax receipts, the government borrowings are increased.

The long-term implications of GFC of 2009 included (Alp & Elekdag, 2011):

 The overall damage to the economy as a result of short-term implications.

 Higher levels of poverty and imbalance of wealth.
 Decline in investments and lose of trust in financial systems.
 Flight of capital.
 Reduction in private investment.

Timeline of the Events of Financial Crisis of 2009

A timeline of the major events of the 2009 financial crisis has been illustrated as follows (Rey, 2015):

Sr. No. Time Event

1 January 2008
2 February 2008
3 March 2008
4 April – June 2008
5 July 2008
6 September 2008
7 September 2008
8 September 2008
9 October 2008
10 November 2008
December 2008
The housing bust was tried to be stopped by the Fed.
As the house sales continue to plummet, Bush Administration signed tax rebate.
Bailouts were started by Fed.
The Fed fund rate was further lowered and it bought more bank debt.
On 11th July, IndyMac bank fails.
On September 7, Fannie and Freddie were nationalized by the Fed.
On September 7, the global panic was triggered as a result of Lehman Brothers
bankruptcy.
On September 7, it was like economy has almost collapsed.
On October 3, 2008, a bill of $700 billion bailout was passed by the congress.
A bailout package was requested by the auto companies.
The interest rate was set to zero and TARP and big 3 bailouts were announced.

Policies Taken by Governments and International Organizations

Although a number of steps were taken by the world governments to reduce the impact of the
financial crisis, the key policy recommendations for the governments and the international
organizations have been listed as follows (Quizpe & Rossini, 2010):

 In case of a crisis, the counter-cyclical fiscal policy can be effective tool in this regard.
 Both in good and bad times, the fiscal policy should be counter cyclical (Quizpe & Rossini,
2010).
 The capital requirements for the shadow banks should be increased (Quizpe & Rossini, 2010).
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 The consumer literacy should be increased and the leverage should be restricted (Quizpe &
Rossini, 2010).
 The government should also work to create an integrated regulatory framework in this regard
(Quizpe & Rossini, 2010).
 The government should have a stronger check on the rigged accounting practices followed by
the companies so they can artificially improve their financial position in a case (Quizpe &
Rossini, 2010).
 The penalties for the individuals or the companies becoming a result of a potential financial
crisis should be increased.

Conclusion
Hence, from the above discussion, it can be concluded that the financial crisis is never desired by an
economy or a country as it leaves it marks both in short-term and long-term scenarios. The global
financial crisis of 2008 was a result of the sub-prime mortgages and was coupled by the other factors
of a collapsing economy. Although the governments of the world used different strategies like bailout
packages and acquisitions of key companies but the loss in job market and reduction in household
income were inevitable. Hence, it is advised that the fiscal policy should be counter-cyclical, the
capital requirements for the banks should be increased and the consumer literacy should also be
increased in the case by restricting their leverage.
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References
Tran, L. T. H., Hoang, T. T. P., & Tran, H. X. (2018). Stock liquidity and ownership structure during
and after the 2008 Global Financial Crisis: Empirical evidence from an emerging market. Emerging
Markets Review, 37, 114-133.

Mehdian, S., Rezvanian, R., & Stoica, O. (2019). The Effect of the 2008 Global Financial Crisis on
the Efficiency of Large US Commercial Banks. Review of Economic and Business Studies, 12(2), 11-
27.

DesJardine, M., Bansal, P., & Yang, Y. (2019). Bouncing back: Building resilience through social and
environmental practices in the context of the 2008 global financial crisis. Journal of
Management, 45(4), 1434-1460.

Cukierman, A. (2013). Monetary policy and institutions before, during, and after the global financial
crisis. Journal of Financial Stability, 9(3), 373-384.

Alp, H., & Elekdag, S. (2011). The role of monetary policy in Turkey during the global financial
crisis. In The Great Recession: Lessons for Central Bankers (pp. 51-80). The MIT Press.

Rey, H. (2015). Dilemma not trilemma: the global financial cycle and monetary policy
independence (No. w21162). National Bureau of Economic Research.

Quizpe, Z., & Rossini, R. (2010). Monetary policy during the global financial crisis of 2007–09: the
case of Peru. bis papers, 54, 299-316.

RBA. (2020). The Global Financial Crisis. Retrieved from Reserve Bank of Australia:
https://www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html