Essay sample Causes of financial crisis and economic recession

On analyzing the financial crisis and the current economic recession, it is primarily necessary to dwell upon the origin of their origin and development that can help to better understand the essence of current financial problems.

First of all, it should be pointed out that the deterioration of the economic situation in the US can and does affect substantially the world economy and global financial markets. The modern economy and financial markets are closely intertwined. The process of globalization stimulates economic development and growth in different parts of the world, while, on the other hand, it makes countries extremely dependable on the situation in foreign markets and vulnerable to economic recession and crisis, such as the one that started in the USA and expanded worldwide.. In such a situation, the current recession of the American economy produces a negative impact on the development of the world economy and global financial markets at large and some countries in particular. Naturally, the US is the country, which is the most affected by the economic recession. This is why it is extremely important to analyze the currents situation in the US economy and find out major causes of the economic recession, its effects and possible perspectives of the further development of the US economy.

In fact, the role of the home mortgage crisis can hardly be underestimated because this crisis practically undermined the stable functioning and development of the US economy. It should be said the decrease of the housing market in the US could be observed since 2005 that naturally could be viewed as a direct indication to the upcoming crisis of the market as well as the deterioration of the economic situation at large, crisis in the financial market of the US and, as a result, the slowdown of the economic growth which outflow into the economic recession that could be observed nowadays in the US. However, it is necessary to underline that specialists (Williams) lay emphasis on the fact that the housing market of the US is not in the freefall. In fact by 2007 and till the present moment the situation in the housing market is relatively stabilized, but the problem is that the current housing market suffers from a substantial fall that has occurred since 2005. At the present moment, the housing market is really in a very difficult position and, what is more important, it does not really demonstrate positive trends to the growth, while it is one of the major priorities of the US economy to revive the housing market and return its financial dynamic, at least, to the past level that existed a couple of years ago. In such a way, the overcoming of the crisis in the housing market can open the way for the activation of the American economy at large, its stabilization and ongoing growth.

In this respect, it should be said that the mortgage crisis in the USA provoked a profound financial crisis in the country, which influenced foreign financial markets as well. In such a situation, the financial instability increased uncertainty of specialists in the further development of financial markets and financial services faced a serious problem of the retardation of the development of financial markets worldwide and decrease of financial activities. At the same time, international financial markets suffered from the dramatic changes in the price of products which are strategically important for all countries of the world, such as oil.

The growing oil prices also produced a negative impact on the economic development of the US and contributed consistently to the current economic recession in the country affecting dramatically the situation in global financial markets. In fact, the oil prices have already hit the ceiling and reached the unprecedented peak of 100 USD/b.

Obviously, in such a situation, it is very difficult to maintain a high level of the economic growth because the consumption of energy, which naturally means the consumption of oil and its products, at least remains stable or even growth, while the growing oil prices make the costs of production consistently higher. Taking into consideration the weakening currency rate of the US dollar, it should be said that the situation is absolutely unfavorable for the US economy. It proves beyond a doubt that the US economy has to overcome the current crisis and minimize the negative effect of the growing oil prices.

In this respect, it should be said that the growing oil prices and the weakening of the US dollar have caused another serious problem the high inflation rate, which has reached 5,8% in 2007 . At this point, it is important to lay emphasis on the fact that the US dollar is the main currency used in the global market. In other words, the US dollar is the main world’s transactions currency. Hence, the devaluation of the US dollar produced a direct impact on the international financial markets and services.

In such a way, the galloping oil prices, which, though have decreased recently, and the devaluating US dollar aggravated the situation in international financial markets and financial services even more. In this respect, one of the dominant trends in the financial services at the period of the economic recession was and still remains the return of the capital from abroad to the US and other developed countries, which renowned for the export of capital at the epoch of the economic growth. In fact, the level of foreign direct investments has decreased dramatically in recent months as the economic recession progressed. Therefore, the US and leading countries of the UK as well as developed countries, such as Japan, needed to return their financial resources from developing countries as well as developed countries where they invested their capitals. At the same time, the withdrawal of capital had a very negative impact on financial markets and aggravated the economic recession even more. In addition, the macroeconomic instability contributed to the further deterioration of the situation in international financial markets and financial services, while the devaluation of the US dollar affected international trade.

In such a situation, international financial services faced an unparalleled problem of growing losses and decreasing revenues. For instance, the financial service giant Merrill Lynch, announced billions of dollars in losses. Eventually, the agreement was reached for them to be taken over by Bank of America for only two-thirds of its market value.

Moreover, other leaders of financial services announced of their problems. For instance, the bank Lehman Brothers shocked the financial markets by filing for bankruptcy, crushed under huge debts that totaled $613 billion (Latham and Braun, 2008). The similar problems faced the insurance giant AIG which was rescued by the Federal Reserve’s injection of $85 billion and gain of 80% stake in the company (Latham and Braun, 2008).  The same trends of falling down of leading financial services companies, banks and insurance groups, could be traced worldwide, especially in well developed countries.

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