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Credit Crisis

In: Business and Management

Submitted By TruestBaller
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1. Events causing the Global Credit Crisis

The global credit crisis was highly due to the crash of the American economy. It all began in 2001 and 2002 when the Bush administration changed laws on how and to whom banks could lend money for large purchases. This widened to pool of people who could get a loan. At that time, a change was also made on how mortgages were viewed financially. Essentially the value of the mortgage and the property didn’t match. So banks began to lend billions of dollars in sub-prime mortgages. These assets were being loaned at the expense of the borrower. Big investment firms such as Merrill Linch and Lehman Brothers invested heavily in these sub-prime mortgages. Of course the borrowers weren’t able to pay back their loans and as a result the mortgages defaulted. Now in large transactions such as these mortgages, insurance is provided. At the time, most of this insurance was being provided by AIG. Eventually, AIG ran out of funds to support these expenses but still had money to pay out. These were the biggest events that lead towards the global credit crisis.

2. The immediate effects, or evidence that a Global Economic Crisis existed

There were immediate signs showing that the global economic crisis truly took place. All the big banks and corporations believing they couldn’t fail, did, which lead to the economy taking a big hit. To begin with, investors lost unbelievable amounts of money on bank and corporation stocks. The same companies saw a big drop in income, prompting them to lay-off many employees. Therefore a lot less of their products or services were distributed. And as a result of the high unemployment rate, the average household income dropped severely. So there was a lot less cash flow to stimulate the economy and the government’s tax base dropped because there was a much lower number of people to tax for employment and housing. Now, banks are afraid to lend money because they don’t want to end up like the Wall Street banks, so they have stopped lending money. This cuts back on expansion and consumers won’t be spending as much money. Therefore even more jobs will be lost.

3. The initial Global Response to the Credit Crisis

Global awareness of the credit crisis spread quickly, and governments decided that taking action immediately would be the best option. Essentially, both the Bush and Obama administration believed spending money was the best way to respond to the crisis. To begin with, the Federal Reserve lent large sums of money to companies to aid them avoid bankruptcy throughout the crisis. The U.S government just kept printing more and more money to recover poorly allocated funds and re-stimulate the economy. This however just led to inflation where goods and services became expensive and the U.S dollar lost value. The U.S government did however takes steps to try and reassure investors and get banks to start lending again. Certain expenses have also been cut, for example the military is slowly pulling out of Iraq. Many European countries also decided to switch ownership of many companies from the private sector into the public sector as an attempt to maintain stability of infrastructure. This not only gives support to services but creates more employment.

4. My opinion on the current Canadian economic situation

Canada is the world’s eighth largest economy affected by the global economic crisis. This is highly due to our strong affiliation with America. There are many benefits of association with America such as cheap trade and labour, however there are large repercussions. In the end, our economy remains much stronger than America’s. This is due to a variety of factors. First of all, as opposed to our big spending neighbors, we have no large investment-only banks and we have a strong banking sector. I also believe we have a more rational governing body and the tools to work ourselves out of a recession (natural resources etc.). Canada has done things such as keeping the export and import amounts relatively similar. Not only that, but statistics show how Canada’s economy is stable compared to most of the world. We have a strong GDP, a relatively low unemployment rate, controllable debt and a large stock of money. I am very comfortable in saying that Canada’s economic situation is in good shape in comparison to many other countries and the overall global economy.

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