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Economic Crisis Essay

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omic crisis

Running head: The Global Economic Crisis

The Global Economic Crisis
Sehrish Saleem Lodhi
Institute Of Business Management

The Global Economic Crisis

          Is our world going through another 1930's great depression?. This is the question that rise in the mind of the one who analyze the prevailing economic situation of the entire world . In 2007 none had an idea that the world will reach the verge of such catastrophic economic and financial breakdown. Some economists believe that there is still a long and harsh way to go and the worst is yet to experience. Historians compare the current crisis with that of 1930's, when the world was experiencing an overall economic collapse as a domino effect.
          The root of the current global financial crisis is traced back to U.S sub-prime mortgage crisis in July 2007. Initially the crises were not so noticeably but since September 2008 a series of unprecedented events diverted the attention of the world to this serious matter. The financial institutions of U.S.A had gone through inappropriate period of lending to public to buy homes. As people had more money in their hands, the demands for houses rise and hence the prices of houses also rise to fill the gap between the demand and supply of the houses. And when the prices rise above the original people sell their house, repay their loan and demand a new loan to buy another house. This cycle

was known as 'housing bubble'. Looking at the situation the federal bank used the contractionary monetary policy and increased the interest rate on which loans were drawn, this made procuring loans difficult. The contraction of money in the economy decreased the purchasing power of people and hence the aggregate demand of houses fell and prices also fell down. The prices went down to 10% in 2008. Now the borrowers were unable to pay back their loans as a result financial institutions had to take over the...

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