Causes of the Global Financial Crisis

This study note looks at some of the root causes of the global financial crisis that exploded in 2007-08.

Chain of cause and effect:

  1. US housing and mortgage bust
  2. Liquidity and credit crunch spread to all credit and financial markets
  3. Economy-wide recession in the US
  4. Recession in most advanced economies
  5. Banking crisis led to the sovereign debt crisis
  6. Great Recession of 2008-09 bottomed out in late 2009
  7. But the long period of slow growth in countries burdened by debt


Root Causes of The Great Recession of 2008-09

  • Years of low-interest rates
  • Lax supervision and regulation of the financial system – regulatory failure
  • Excessive risk-taking and leverage of the banks – especially subprime lending
  • Global current account imbalances and global savings glut
  • Irrational exuberance and animal spirits leading to financial bubbles
  • Distorted incentives of credit rating agencies

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