Ensuing the great depression of 1930s, the world saw only one thing of its kind in the face of a might and ferocious financial crisis known as global financial crisis of 2007 and 2008. It depicts a situation occurring in those years when a large part of the nominal value of financial assets was lost. The initiation of this crisis was in 2007 with subprime mortgage market in the USA caught up in a troublesome position.When the investment bank “Lehman brothers” collapsed in September 15th, 2008, an international banking crisis resulted. The financial impact was globally magnified owing to high risk-taking banks such as the Lehman brothers. The great recession also known as the economic downturn followed this crisis. The European debt crisis hitting European financial system was the next to fall in crisis.
Amongst many reasons for this crisis, one would be that the banks were able to create too much money (because only one percent interest was to be given by the federal reserves in USA reformed by Alan Greenspan) so they could get it very feasibly. This money was then used by the banks to push up house prices and speculate on financial markets. Eventually, the debts became unpayable. As the debts by the banks are not paid, the bank is under the threat of going bankrupt. This caused a financial crisis. After the crisis, banks limited their lending to businesses and households. Because of slowdown in lending, prices in these markets came to a drop and the bubble burst. In a panicked state the banks cut lending even further. The economy started declining. After the conditions got intense, there came a point where banks refused to lend and that is the time the economy shrunk enormously.
The effects of financial crisis include the market instability. Greed was evident among those who later had to suffer because of this crisis. Furthermore, the housing market declined as well. The credit well dried up and there was no credit. The whole world had to suffer because of this and the economy throughout was affected.