Global Financial Crisis Analysis

Introduction

The Global Financial Crisis is widely regarded as the worst financial crisis to have hit the world since the end of the Great Depression. The crisis had worldwide effects as rates of unemployment escalated, stock markets dropped while collapse of giant multinational enterprises was only saved by national governments bailouts. Since its peak in 2007-2008, analysts have embarked on establishing the key factors behind the crisis with varying causes put forward. This paper seeks to discuss these key factors by relating them to competing economic theories. By looking at the available literatures on the area, the paper will analyze how economists have tried to identify them in empirical research. Throughout its discussion, the paper

In his analysis of the situation, Stockhammer (2012) notes the significant role played by global current account balances and the effect it had on global financial trends. According to the author, imbalances in both the global current account and net capital flow played a key role in the Global Financial crisis. An excess of saving in the emerging economies meant that financial institutions across the world had more money to lend than the demand required. Consequently, pressure on the interest rates declined, and banks availed loans at much lower rates under easier conditions. A credit boom followed as banks sought to capitalize on the increased liquidity, which involved higher risk-taking by the

Five years since the peak of the crisis, its effects still felt in some economies; analysts have sought to argue how global imbalances hugely contributed to the crisis. In this section, the paper looks at how global imbalances have insufficient information on global financing and how this cannot be relied on to assert it as a cause of the crisis. Firstly, current accounts and net capital flows do not provide sufficient information on financing. On the contrary, they serve to highlight net claims adjustments that result from exchange of real goods and services in the country. In so doing, current accounts and net claims leave out gross flows and their impact on existing stocks. This includes, but not limited to, exchange of financial assets across countries. It is critical to note that, exchange of financial assets across countries forms a significant part of cross-border financial activity. Based on the above argument, one would point out that current accounts provide little information on the impact a country’s borrowing and lending has on global financial performance. Additionally, current accounts fail to provide information on the level to which investment expenditures within a country gets financed from