Question #1

What caused global financial crises? .Write brief overview?

Before Global Financial Crises economic status of United States was stable, Unemployment,
interest rate and inflation rate was low. In this situation houses price grew to the sky.
Expectations were that household prices would rise this led property developer and households
to borrow more houses. Mortgages loan were above the purchase price of house. Such risky
borrowings were made by investors to make short term profits. Banks were willing to pay large
amount of risky loans because of following reasons.

 Large numbers of lenders were willing to give loans and competition was increased due
to good economic condition.
 Many lenders give loans to borrowers without assessing the condition of borrower this
thing affected the quality of decision maker and this they didn’t expected the loss. In a
limited time large numbers of mortgage loans were in the market.
 Investors who were purchasing Mortgage Buying Securities thought that they are buying
low risk assets.
 Banks started to borrow more money in order to purchase houses. No doubt borrowing
money increases the potential of profit but at the same time there is equal probability of
risk.
 There was a lack of proper rules and regulation by government institutions. Every
individual was given loan at lower rate and fraud was common in this system

Question # 2:

What were the effects of global financial crises?

Before the global financial crises of 2008 global economy was at slow pace. House prices and
dwelling prices were rising and this thing slowed down the economy of United States. Economy
of United Kingdom was also affected by this trend. However other world countries such as China
and India were resilient toward this and continued to grow. With the deterioration of Lehman
Brothers, global economy took turn ay its worse.

Decrease in spending:
First Impact of global financial crises was that households cut down their spending. This results
in decrease in manufacturing of goods. An environment of extreme uncertainty was created.
Extreme decrease in manufacturing of industrial products decreased the GDP of countries .G7
countries were greatly affected .Countries such as Japan who export their products was facing
extreme downturn. However China and India were continued to expanding but their growth
slowed down. IMF forecast for world in 2009 was just about 4 percent or near its medium term
normal pace. In January 2009 was decreased to development of half percent and this estimate
was later diminished to around negative half percent.

Several reasons are being proposed for this great recession.

 The main which is described above was the widespread loss of trust in wake of Lehman
Brother and that related period of remarkable unrest in the worldwide monetary markets.
This weakening was clearly observed in survey based measures of commerce and
business in major economies. It is also said that fast communication and electronic media
majorly contributed to the widespread uncertainty. As a result of uncertainty household
began to change their spending plans
 A subsequent factor related to Lehman Brother was further tightening of credit standards
by banks in major economies and a marked increase in the price of risk. This showed
itself in addition to other things, in disruption of trade credit and insurance, and in
decrease in lending of consumers and business spending. Reflecting to these
improvements, the pace of credit growth fell pointedly in nations
 These impacts transferred rapidly to the globe especially Asia, as the business cut down
their production and Asian countries were the major importers. Fall in exports were
pronounced for certain manufactured goods such as cars, steel and electronics which are a
large share in production. This effect appears to have been amplified by internal cyclical
dynamics in some countries.
 Finally, part of the slowdown in global activity mirrored the unavoidable pullback in a
few divisions that has been extended. The most evident of these were the housing and
financial sectors in significant nations, this point can be extended to high level of debt in
developing countries.

Question #3
Subprime Mortgage crises:
Borrowers who are given mortgages are called subprime mortgages. Prime rate is for those
individuals who have good credit line and strong family background. Subprime is for those who
struggle hard for meeting and fulfilling their needs. People who are given subprime mortgages
have low credit scores and debt on them. Such kind of people meet difficulty with meeting their
needs and such monthly payments have much higher interest rate and lender consider this loan as
riskier
Banks and insurance agencies caused subprime mortgages. Flexible investments and banks made
home loan supported protections. Interest in mortgages caused increase in assets such as houses.
At the point when Federal Reserve raised the government subsidies rate, it caused mortgages
interest rate to sky. Therefore, home costs plunged, and borrowers defaulted. Subordinates
spread the hazard into each edge of the globe. That caused the 2007 financial emergency, the
2008 Financial crises, and the Great Recession. It made the most exceedingly awful downturn
since the Great Depression.

Question # 4
Policies and Regulations:
Financial crises had great and noteworthy impact on the economy on the level on global activity.
A great number of forces have been working on other way and can be relied upon to support
recovery. Most important policies were the fiscals and other policy measure. Two kinds of
policies were made one for immediate repair of credit markets and other for redevelopment of
demand market and those directed at medium term plan for decreasing the danger of similar
financial crises in future.
With respect to the prompt issues, experts in all the major economies took a large step to provide
help to financial sectors for reducing the tightening condition of money faced by private sector.
These measures took few forms such as facilitation of central bank to improve access to liquidity
and targeted facilities to unclog credits, direct infusion of capital into financial sectors and
provision of different types of government guarantees. In United States there were noteworthy
measure to remove bad assets from balance sheets of financial sectors and purchase long term
securities all these steps were taken in order to protect mortgages and credit markets. Interest rate
in major and developing business sector nations were cut strongly as crises unfold. In major
countries policy rates were diminished to near zero and national banks moved to quantitative
facilitating ways to deal with particular markets and economy.
The pass through of this decrease in policy rates to lower family units and business segment rates
was bigger in certain nations than in others. In Australia, the degree and speed of go through was
moderately enormous, reflecting the competitive strength of financial markets which to a great
extent kept away from the acquisition of high-risk securities and ease of loaning benchmarks.
This effect was greater in other countries where they were unable to cut down the interest rates.
Countries such as United States, China, United Kingdom and Germany announced many
packages for increasing demand. Fiscal measure were taken to improve private spending