The Global Economic Crisis, How it began in the US

The Global Economic Crisis, How it began in the US

Believed to have begun as early as December 2007, the global economic crisis has had huge consequences for the billions of people living across the world. Of a similar magnitude as that of the 1930’s Great Depression, the crisis swept across the world like a wave, causing many institutions to declared bankruptcy, which in turn resulted in millions of people losing their jobs. More than three years later the resulting recession is still hitting hard, and whilst many people have become adjusted to a new and often more expensive way of living, the dramatic effects of the crisis are likely to continue being felt for the resulting months and years to come.

There has been much debate over where the origin of the global recession lay, and most officials now firmly believe that the huge fallout was initiated by failings in the US housing market. Problems can first be traced back to 1997 when the housing boom in North America caused mortgage lenders to start increasing the access to large loans. With a soaring demand for properties, banks naturally wanted to make mortgages more accessible to residents and thus slashed interest rates and increased loan sums to encourage more purchasers. Risk was written off from individual mortgage companies to firms dealing with credit securities, allowing banks and financiers to believe that they were keeping their risk low. However, with a booming housing market it was unsurprising that many loans were advertised under false pretences, with rates and costs not actually being those that were initially outlined. Meanwhile, with a huge majority of residents able to get financing, even if they couldn’t afford it, many loan repayments ceased to be repaid.

Whilst this may not seem serious, on a national scale the degree of mortgage repayment losses had a snowballing effect. As banks suddenly became aware of the high risk involved and lending almost dried up. Even between banking groups as each company had no idea and no assurance of the risks involved. With no liquidity left in the market, and the trust between banks dissolved, the market ground to a sudden halt.

The result of this sudden market halt was seen across the world, with many institutions going bankrupt as they lacked the capital to continue actively conducting business. Whilst Fannie Mae and Freddie Mac were nationalised to stop them from failing, Lehman Brothers declared bankruptcy. Consequences from this fallout remain in place today, with many economies struggling to keep abreast of the situation. Industries such as air travel saw plunging demand, with flights to New York and other destinations noting considerable losses in custom. Food and commodity prices have soared, and taxes have been raised in an attempt to pay for the bailout costs which were used to save failing banks. And whilst the world may have climbed out of the deepest depths of the recession, the financial crisis of the 21st century continues to have significant ramifications around the world.