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After the Great Depression of 1930’s, a recent economic crisis is the nastiest one world has ever

experienced. Accompanied with substantial layoffs, world economies experienced incidents of

bank failures, credit crunch, massive defaults and collapse of most reliable institutions. The

major event which sent alarming signal to the world financial markets was collapse of Lehman

Brothers in September 2008. Unlike the great depression of 1930s which affected mainly

European countries, the recent one affected almost each economy of the world, as for now world

has become a global village and economies are well integrated and interconnected.

When it comes to the causes of economic crises, despite of the extensive research work of almost

more than a half decade, on the issue no consensus has been developed among economists.

However, most of the explanations come to the conclusion that heavy inflow of foreign exchange

in US economy is one of the main reasons of financial crises. The inflow primarily comprised of

the capital coming towards US from Asian countries mainly from China. Whenever the supply of

funds increases it motivates people to borrow for unproductive purposes. Increased supply of

credits at low rates of interest means that people even buy those assets which they could not

afford. Banks advanced loans without properly taking into account the risk of defaults associated

with these advances. Resultantly defaults on mortgages deprived them of their assets and

investments.

Financial institutions lost their investments as the governments and monetary authorities

remained unable to properly control the actions of markets. Policy of keeping interest rates at

extremely low levels added up to the crises. The large current account deficit maintained by US

and a huge trade surplus of China can also be regarded as a fundamental cause of economic

crises. This scenario represented imbalances in saving and investments in one of the largest

economy of the world i.e.US.

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The crises left people making them homeless as the housing industry was largely influenced by

financial crises. People borrowed a lot for house building and then defaulted. Low real wages as

a resultant of economic crises added up to the miseries of households. A big amount of human

capital was wiped out reducing the current and future incomes. The actual cost of crises was

double the estimated one. In many countries the losses incurred as an outcome of economic

crises were far more than the real output of the countries during a particular year. Massive

defaults discouraged investments making people unemployed and reduced the opportunities

available. As a result of global economic crises the government intervention in the free operation

of financial markets was promoted. Governments responded with the instances of monetary and

fiscal policies which further resulted in the drop in global economic activity. The impact of

government intervention resulted in the widespread trade deficits in the effected countries.

On the whole insufficient regulation of financial markets has been blamed the most by

researchers to be the reason of financial crises. So we may conclude that efficient regulation of

credit markets with the transparency of respective authorities may contribute to lessen the

impacts of financial crises. As far as the consequences are concerned, these were not just

confined to the economic ones but also have psychological aspects. Crises promoted

hopelessness and crime rate in many economies. However the fundamental reason of the

economic crises is hidden behind the human instinct of greed.

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References

Dunaway, Steven (2009) Global Imbalances and the Financial Crisis.US, Washington: Center for Geoeconomic

Studies.

YaleGlobal Online: From http://yaleglobal.yale.edu/special_report/728

The Financial and Economic Crises from , .http://unctad.org/en/Docs/gdsmdp20101_en.pdf