The US financial crisis that started in the middle of 2007 is an ongoing economic crisis.It is nothing less than any huge disaster for all the economies of the world including the developed as well as the developing countries. This financial crisis started in the middle of 2007 in the US mainly due to the liquidity shortage in the banking system of the United States of America which was because of the abrupt increase in the prices of the houses or actually due to the collapse of the housing bubble that had grown bigger and bigger with time. As a result of the collapse not only the US suffered the consequences but the whole world suffered huge loses. The financial markets all over the world were affected, the stock markets came down, many large financial institutions collapsed or were being sold and rescue packages had to be adopted by many nations even the world wealthiest economies had to adopt proper rescue packages to come out of this crisis. This U.S. financial crisis is considered as the worst financial crisis after the 1930’s great depression by many people. It caused great damage to the economies and companies incurred huge loses, millions of people lost their jobs and millions are in huge debts and a lot many also became bankrupt.
The U.S economic crisis and the world economy
This economic crisis started when the U.S. housing bubble bursted after reaching to extreme heights, the housing bubble arose as the people of the United States started to purchase expensive houses on credit .People used more and more credit for their purchasing and their home loans increased due to which a housing bubble was created and a sharp increase in the prices of the houses was observed. The prices rise higher and higher and as the loaning companies and the banks had a lot of money so more and more loans were being given, the people got more loans, to purchase the houses which they cannot even afford; these are called the subprime loans. On one hand people were purchasing houses through loans and on the other hand many refinanced their homes to have a lower interest rate by changing their mortgages and once they had refinanced they would invest the money again by getting another mortgage. The loaning companies took full advantage of this situation and gave adjustable rate mortgage loans which had lower interest in the beginning but it would rise with time so now even more people started to take loans just as the loaning companies wanted(Shah,2009). More and more people purchased the houses with the idea that they would sell the house later on a high price and would benefit from the high price. The high housing prices also attracted many American as well as foreign companies due to which more investment came to the loaning companies and the loaning companies gave it as loans again, it was profitable and the business was at its peak but as it is said that what goes up must come down soon the housing prices started to decline because the housing companies had built far too many houses and the people soon realized that they were paying much more money for the houses than their actual worth (negative equity) so many foreclosures took place, it is approximated that only in 2007 almost 1.3 million people lost their homes while the price of the houses continued to decrease and people started to sell their houses in loss as the amount of their loans were higher than the price of the house itself and with each house sold in loss the loaning companies too were not getting much so as the housing bubble burst it brought great loss to everyone the individuals were up to neck in debts , the foreign companies that invested lost about $512 billion as well as American companies also incurred huge loses, stock markets all over the world went down and the world stood in shock (Shah,2009).
Europe and the financial crisis
Like the U.S, Europe also suffered great loses, major financial institutions were brought down by this crisis and the remaining ones needed capital to continue. This crisis turned out to be a huge one for Iceland as its economy is dependent on their financial sector so because of this crisis their banking system failed and they had to take loans while this crisis further lead to the fall of the Iceland’s government. The European countries adopted different measures to overcome the effects of this crisis some nations started nationalizing and others took different measures. The European Union was also concerned about this matter implemented tax cuts worth €200bn over two years to have the business running as it was running before the crisis.
Asia and the financial crisis
Asian countries were also affected by this economic crisis as the Asian products and services are sold internationally and as there were not much sales in the west the problems started to rise in the Asian countries. In Asia, India and china are the two large economies after the Japan. The Indian economy although grew in 2007-2008 but its growth soon slowed down by a noticeable amount which was alarming for the Indians although their economy was still at a better stage but the speed with which it came down was a source of concern for them. Like India, China too experienced the same scenario that is their economy also fell down sharply. Both the countries had to make recovery plans of millions of dollars to counter the effects of the global economic crisis. Where as Japan, also faced troubles due to the crisis the Japanese economy which was already struggling with it own crisis and so due to the global economic crisis as their industrial production fell to a record level and the decline in their exports also caused problems for the Japanese government(Shah,2009).
The financial crisis and the developing world
The economic crisis had shock the rich economies of the world and had done a lot worse to the countries of the developing world. The crisis caused great financial instability with ever high prices of commodities. The economic crisis posed a great risk to the developing world (Shah, 2009).
Many economists believed that the longer this crisis had to stay the worst it would be for the world economies and the things could be even worse. Also the wealthy Arab world was not left alone by this crisis as it suffered loses of almost $4 billion and caused a great employment problem in the Arab world. This great economic crisis has the world thinking of ways to counter it and various recommendations have been given by economists from all over the world and many countries have adopted different strategies to save themselves from it .The United Kingdom is applying the technique of systematic injection while interest rates are now being declined by the banks in many countries moreover capital injections are being done by governments to counter the effects of the crisis.
Shah, A.(2009). Global Financial Crisis. Retrieved July 28, 2010 from http://www.globalissues.org/article/768/global-financial-crisis