Global Financial Crisis Essay Example | Topics and Well Written Essays - 1500 words

Global Financial Crisis - Essay Example Investments Banks in United States received a huge blow of the financial crisis for which they gradually disappeared from the financial scenario of the country (Kenc & Dibooglu, 2010, p. 3). The crisis of the mortgage market during 2007 rendered a huge impact on countering a decline in the value of the market price of large securities and other financial instruments held by the financial organizations of the world. Credit Crunch which happened in the American markets created a global turmoil by declining the value of debt instruments all over the world by restricting credit both on personalized and on organized levels. Thus the contagious effect of the financial credit crunch of America took the form of global financial crisis by ripping off the stability of the financial institutions on an international scale (Longstaff, 2010, p.436; Aronson, 2010, p. 276). Reasons for the Global Financial Crisis The main reason which is attributed to causing the event of global financial crisis in the global scenario is the effect of contagion. Contagion effect has been identified to generate similar shocks of financial breakdown in one economic system to other financial systems operating throughout the world mainly through three ways. In the first manner the potency of economic breakdown in one financial market is spread to other world economies through the information network. This information obtained can hugely affect the working of the economic system of the other countries largely jeopardizing them. Secondly the event of contagion also gains ground by disturbing the liquidity position of the financial assets of the other global economies. A strike imposed on the availability of financial liquidity through the system of credit in one economy also renders potential impact by curbing the amount of liquidity in other economies of the world. In the third case the contagious effect of the financial crisis in any developed region like America also weakens the desire and potenc y of other economies to enhance the risk portfolio in their financial system (Longstaff, 2010, p.438). Along with the above reasons there were several other causes like the selfish outlook of the micro factors of the financial system like the groups of investors, creditors, banks and other financial institutions. These economic groups were busy considering avenues to get the best of the financial system by drifting the financial and economic policies of the government in their favor. The impacts rendered by these systems led to the growth of credit generation in the economy of United States until it led to the final demise. Further the social policy outlines taken by the government of United States to help render huge credits to the poor people of the country to construct houses also led to the happening of the credit crunch. Huge amount of credit ushered in the economy with low amount of interest also led the banks to gain the advantage of such. The financial system of granting cre dit in America was managed by different agencies that used to set policies and regulations detrimental to the economic system of the country. These agencies were themselves not successful in rightly satisfying the responsibilities entrusted on them and mainly wanted to avail the favor of the intricacies of the government regulations pertaining to credit (Wignall & Atkinson, 2009, pp. 2, 5, 8; McNally, 2009, p. 36, 38). The opening up of the economic s