The Global Financial Crisis: Causes and Consequences

Summary Paper The Global Financial Crisis: Causes and Consequences.

The Cause or Causes?

There is division between analysts of what the single cause of the global financial crisis (GFC) was, or whether one even existed. There are those that believe that there were a series of events that contributed to the crisis, whilst others are united in identifying subprime mortgages as the sole catalyst. However, there is still division in the latter group as to which part of the subprime mortgage issue caused the 2008 financial collapse. The following discussion focuses on the primary issues and events that caused the GFC and their subsequent fallout. Theory 1: Not just one cause Warwick J. McKibbin believes that the foundation of the GFC lay, in part, in the decline in the current account balance in the US (Lowey Institute 2009). As shown in Figure 1, he illustrated that the overall fall in the current account balance prior to 2007 is attributed to a number of drivers that created the climate from which the GFC evolved. 1 Main drivers behind the decline in current account balance in the United States

US dot com inv estment boom 0 -100 -200 -300 US fiscal deficit and public dissav ing, low personal sav ing rates Boom collapses

US$ billion ...

-400 -500 -600 -700 -800 -900 1991 1993 1995 1997 1999 2001 2003 2005 Japanese inv estment slump Asian financial crisis and loss of inv estor confidence

Source: OECD Economic Outlook No. 76, December 2004

Figure 1: Main drivers behind the decline in current account balance in the United States (Source: OECD Economic Outlook No. 76, December 2004 as quoted in McKibbin 2009).

McKibbin (2009) believes that it was in this climate that a number of events occurred that caused the meltdown of many world economies: Contraction in the US housing market weighed heavily on share markets and households. Massive deleveraging by financial institutions with exposure to mortgage backed securities which lacked transparency. Lehman...