RobertDomino theorySat May 19, 2012 5:32am188.8.131.52Global Financial Crisis - What caused it and how the world responded
The credit crunch
The global financial crisis (GFC) or global economic crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. This, in turn, resulted in the US Federal Bank injecting a large amount of capital into financial markets. By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile. Consumer confidence hit rock bottom as everyone tightened their belts in fear of what could lie ahead.
The sub-prime crisis and housing bubble
The housing market in the United States suffered greatly as many home owners who had taken out sub-prime loans found they were unable to meet their mortgage repayments. As the value of homes plummeted, the borrowers found themselves with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today's market than the bank had loaned out originally. The banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst. This is commonly referred to as the credit crunch.
Although the housing collapse in the United States is commonly referred to as the trigger for the global financial crisis, some experts who have examined the events over the past few years, and indeed even politicians in the United States, may believe that the financial system was needed better regulation to discourage unscrupulous lending
As for the need for better regulations, remember the hungry cat analogy.
No CRA=no social engineering=no unintended consequences=far fewer irresponsible loans=no or much less severe recession.
Remember sequence and magnitude. The world's banking system is almost completely interconnected. When our larger banks started suffering the CRA initiated disease, others soon followed. However, the magnitude of the housing reversal in other countries did not approach ours. Also, Europe's overall financial crisis is related to a long term disregard for fiscal discipline.
You may find it an interesting and revealing exercise to: remove the US housing crisis from the equation, and then demonstrate how we would be in a severe recession anyway (be sure and include the math as I have). Get some of those learned individuals you mentioned to help you. Good luck, you'll need it.
- Can you show wondering, Fri May 18 2:55pmthat the housing boom and reversal in "various countries" were due to CRA legislation or "social engineering"?
- Domino theory Robert, Sat May 19 5:32am
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