” The 2007–2012 global financial crisis, also known as the Global Financial Crisis and 2008 financial crisis, is considered by manyeconomists to be the worst financial crisis since the Great Depression of the 1930s.. It resulted in the threat of total collapse from large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 7, 2007 when BNP Paribas terminated withdrawals from three hedge funds citing “a complete evaporation of liquidity”.
The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered by a complex interplay of the overvaluation of bundled sub-prime mortgages, questionable trading practices on behalf of both buyers and sellers, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and mid-2009. In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009. In the EU, the UK responded with austerity measures of spending cuts and tax increases without export growth and it has since slid into a double-dip recession.
Many causes for the financial crisis have been suggested, with varying weight assigned by experts. The U.S. Senate’s Levin–Coburn Report asserted that the crisis was the result of “high risk, complex financial products; undisclosed conflicts of interest; the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” Two factors that have been frequently cited include the liberal use of the Gaussian copula function and the failure to track data provenance. The 1999 repeal of theGlass–Steagall Act effectively removed the separation between investment banks and depository banks in the United States. Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. Research into the causes of the financial crisis has also focused on the role of interest rate spreads.
In response to the financial crisis, both market-based and regulatory solutions have been implemented or are under consideration. Paul Krugman, author of End This Depression Now! (2012), argues that while current solutions have stabilized the world economy, the world economy will not improve unless it receives further stimulus. Buchanan, Gjerstad, and Smith argue that fiscal and monetary policy are ineffective, failing to reignite residential investment and construction as they have in past contractions. The current type of contraction requires balance sheet repair via currency depreciation and export-driven growth. Fiscal stimulus extends a current account deficit and retards export growth. If the world economy does not improve, many economists fear sovereign default is a real possibility in several European countries and even the United States. ”
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