Global Financial Crisis Impact and Cause

The Global Financial Crisis (GFC) of 2007 stemmed from a lack of regulation of the United States Financial System. The financial system comprises of financial institutions, markets, services and practices that allow for the transfer of money between savers and borrowers.1The lack of regulation triggered a liquidity shortfall in the United States’ banking system, attributed to the overvaluation of assets. In the US, sub-prime mortgages were sold widely to people looking to get houses that they could not afford for a low rate. When the supply of houses outstripped the demand for them, banks increased their interest rates, making it harder for financially inept individuals to repay the loan. The businessmen that developed these mortgages tied these loans with several liquid assets that had no value, worsening the financial burden felt by many. Without repayments on their loans the banks lost all their money.   Other factors that contributed towards the GFC include falling consumer spending and rising unemployment domestically within the US, tight margins on credit borrowing and extensive international trading of goods and services. Due to the highly connected nature of the global financial sector, were credit money is lent and repaid frequently to and from places around the world, the Australian economy felt the impact of this crisis. As the Australian Securities Exchange experienced a downturn, the Australian Government attempted to bail out banks in order to stimulate the economy. Throughout 2007/08 the government implemented extensive damage control strategies which effectively stabilized the effect of the crisis, making Australia the only country that stayed out of a recession. This is based on Keynes’ Multiplier Theory whereby an initial injection of funds with generate a proportionally greater increase in aggregate demand for goods and services; increasing the demand for labour and reducing the negative outcomes which arise due to the GFC. Economists argue that...