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Financial Crisis and Its Impact on China

In: Business and Management

Submitted By mrhosein
Words 1792
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INTRODUCTION
In the year 2008 the world saw one of the greatest financial crisis since the great depression of the 1930s. This financial crisis also known as the “Great Recession” caused various problems for different economies worldwide. The collapse of the Lehman Brothers bank, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Large sums of tax payer based bail-outs were needed in order to shore up the company. However, the issuing credit crunch made matters worse as it turns the global financial crisis into the worst resection of the last eighty years (The Economist, 2013). The case of the global financial crisis was based upon the bank’s lending policies and the status of the housing sector. Basically, when banks make a loan, new money is created and just before the recession, banks created huge sums of new money by making new loans. In just seven years the banks doubled the amount of money and the amount of debt within the economy. Thereafter, the banks used this new money to increase the prices on houses instead of allowing money to flow to business outside the financial sector. From the money banks created between 2000 and 2007, thirty one percent went to residential properties, which pushed the prices of houses up faster than wages, twenty percent went to commercial real estate, increasing the prices on office buildings and thirty two percent went to the financial sector while only eight percent went to business outside the financial sector. After this the debts created became impossible to pay since lending large sums of money into the property market pushes up the prices of houses and interest must then be paid on these loans. Also, debt was rising quicker than wages and this meant that people would stop paying their loans since they could not afford it, making banks in danger of going bankrupt. This process

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