How exactly did the GFC start? (1 Viewer)

[planino]

I've always been curious about this. The subprime loan crisis in the US was definitely a part of it, but did the crisis 'cause' the GFC since the US is such a significant world player?
The second half of the 'Financial Markets' and all of the 'Government intervention in the market economy' topics went right over my head anyway.

 

[Drifting95]

Watch a few documentaries, one was on tonight on SBS and was a 4 part series. Can't remember the name of it though.

 

[TheGreatest99.95]

watch the doco inside job (2010). Its a good doco on how the GFC happened and what has been done afterwards

 

[Sunners]

Inside job is good to watch but our teacher has told us that if you want it in a few words it was:
Too much Aggregate Demand, particularly in the US and Europe

 

[hasdhil]

a quick overview is that loans in America were beginning to be given to people that were "sub-prime" (i.e. not the first choice and are risky). This happened because investors started demanding more mortgages to use for investments. Ultimately these "sub-prime" people are to default on their loans leading to banks not receiving any money, this then had a chain effect on the other investors using these loans. The federal bank decreased the cash rate however it made borrowing money too easy, especially for people who would not otherwise be able to be granted these borrowings. the decrease in the cash rate is part of the "government intervention in a market economy" in the topic financial markets.

This is very brief but hope it is clear, I would also advice you to maybe watch a video others have suggested

 

[Flamethrower]

Post abit late but anyways, the global financial crisis is in essence the result of a credit crunch where banks did not want to lend to each other due to the perceived risk that other banks would default on their loan resulting in potentially massive losses. This fear is the result of economic uncertainty resulting in the collapse of major investment banks such as Lehman Brothers and AIG international all stemming from the sub-prime mortgage crisis mentioned previously.

Lack of liquidity in the credit markets = lack of investment resulting in a contraction in the global economy.

Though thats just the gist of it.

 

[chrisman9519]

Causes
1. Fundamental asymetries of information in the financial markets (read some of J. Stiglitz' stuff about it). Problems with financial products such as risk and liquidity are factored into the price, so it doesnt matter if there are problems as long as investors know there are problems. investors had no idea
2. Lack of regulation (not deregulation because it wasnt regulated in the first place) of the SHADOW BANKING INDUSTRY not normal banking industry. It was effectively a multi-trillion dollar invisible bank run which impacted institutional investors and NOT so much mum and dad investors, like a share price crash would. (read some Paul Krugman stuff)
3. Bad macroeconomic policy. interest rates were kept low by Alan Greenspan after 2001 crash following a policy of "benign neglect", and too much aggregate demand via debt expansion

The crisis would not be as bad if:
1. Sovereign debt levels in US, Europe and particularly Japan were lower
2. Financial markets weren't as globalised - i.e. foreigners didnt buy as many bad financial products.
3. Confidence was better - lack of confidence led to money being pulled out of productive investments such as corporate bonds, equities (where it was needed), and put into safe havens such as AAA gov bonds. this led to higher corporate borrowing rates (lower investment) and lower government rates (should have meant more gov expenditure, but didnt because of mistimed fiscal policy), and therefore higher overall interest rates, therefore an even worse downturn


i personally believe that this crisis was not caused by deregulation - if it was caused by the repeal of the glass-steagal act (the main deregulation) then commercial banks would have failed. commercial banks didnt fail, investment banks failed and the shadow banking industry failed. the situation deteriorated because when the investment banks and shadow 'banks' failed, they couldn't recieve rescue funding. rescue funding was given to commercial banks - who didnt really need it, while the invisible banks who REALLY needed it failed.

the GFC could have been a small blip if there was good enough harm minimisation (more effective bailouts, and more fiscal stimulus). prevention after the fact is too late, prevention for next time should only be taken when banks are again in good health and everything is stable, not while the recession is happening. deficit reduction only worked with clinton (J.Stiglitz: The roaring nineties)