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Global Financial Crisis Impact And Cause

3004 words - 13 pages

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. ...view middle of the document...

Economists argue that if Australia felt the recession, it would be categorised as a “mild-recession”.2 In order to prevent this Crisis from occurring again, a number of market-based regulatory solutions have been implemented within the Australian Economy and the Financial System.

As lending between banks and consumers dramatically fell due to the lack of regulation of the United States Financial System, extreme panic caused a loss of consumer confidence, making the situation worse. Due to the inability to repay loans in the United States, many people were forced into poverty. The victims of this scheme were drained of cash, and therefore had no money to spend within the economy. The ‘big four’ of the Australian financial system is extremely regulated in comparison to the American system only giving out loans where there is proof that the borrower will likely be able to make repayments on the loan. A decrease in consumer demand saw a decrease of business revue and profits. As labour is a derived demand, businesses could not afford to maintain current levels of staff, further worsening Americans’ financial stability. A lot of American and European businesses that were largely dependent on offshore production in more expensive places like Italy and France were also affected by the lack of consumer demand all over the world, as well as the tight credit measures. Rather than collapsing under the pressure, Italian luxury fashion house Dolce & Gabbana was forced to move most of its production from the “glamorous” Italy and France to China due to the lack of consumer demand for their products in America. Due to the high $311 million net revenue that is generated yearly (prior to the GFC), Domenico Dolce and Stefano Gabbana could afford to lower their prices of their main Dolce & Gabbana collections in America by 20 per cent during the GFC in order to stimulate some consumer spending.3 Unlike Dolce and Gabbana, many businesses could not afford to hire people, or run production the way they always have. They were forced to close down all whilst banks further increase their interest rates. Australian businesses did not suffer as much because Australia’s local businesses obtain funds from Australian banks, which have some of the best credit ratings in the world due to the well maintained flow of money. In addition, as Australian businesses don’t deal with foreign banks as much as a lot of others do in the world, there was a lot less debt troubles within the Australian domestic financial system.

As American banks were short of money, they had to borrow from overseas banks. These overseas banks did not get their money back, and of course, also went into debt from borrowing. For example, a business based in Hong Kong can still be dependent on American Citibank to get funds for their business, also pulling them into debt. This chain effect established a shortage of money all over the world, making several financial institutions reluctant to lend to...

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