In 2008, the U.S. experienced the most horrific economic downfall which trickled and affected Europe and China. According the Guardian it described the global crisis as, “the largest financial shock since the Great Depression” (Stewart, 2008). The financial crisis started in 2007 when the housing prices in the U.S. started to fall thus causing consumers to spend less on constructing their houses. Therefore, the Central Bank would decrease the interest rate and this would not be favourable for the U.
S. economy because it would not meet its demand. Moreover, since the housing prices continued to fall, the value of the mortgage loan would surpass the value of the house. Thus, the homeowners were unable to make their mortgage payments. This U.S.
crisis affected trade with other countries which then affected the financial status of the U.S. banks because they had to seek funds from other countries thus causing other banks to be affected. Also, this crisis caused a reduction in wealth and consumer consumption in the economies. It not only caused financial crisis but physiological crisis because of bankruptcy.
When the crisis came in 2008, the U.S. economy was affected dramatically. During that year, the country did not experience any output growth.
The unemployment rate was at 5.8% and it remained high as it significantly increased to 9.6% in the year 2010. The inflation rate continued remaining low between the years 2008 to 2012. The greatest impact on the U.
S. is that they experienced a budget deficit accounting for 9% of the GDP in 2010. This crisis impacted greatly the Euro Area.
Before the crisis, the country was experiencing low output growth and unemployment was very high. During the world crisis in 2008, the economy experienced a minimal growth in output, but it declined by 4.2% in 2010. However, it had an increase in 2011 but continued to decrease in 2012. While unemployment remained high during the financial crisis, inflation was also affected. Since 27 countries make up the European Market, a number of those countries had recession due to the crisis. China, with the fastest growing economy in the world, was impacted by the global crisis in 2008. Although it was believed that china was “immune” to the crisis because they started to feel the effects until after.
When the banks in the U.S. started to experience the credit crisis, it affected trade with China. Although, it experienced output growth during the financial crisis in 2008. Unemployment rate in 2008 stood at 4.
2% and it decreased to 4% in 2012. While, inflation remained relative low. However, the crisis affected trade because the volume of exports decreased.
The financial crisis steered banks to borrow money to increase their securitization. As a result, they would lend more money to securitize their loans. At times, some banks started to buy securities from others. The world crisis in 2008 was so intense that it affected the operations of financial institutions, thus, causing a loss for them. To fix the problem, the U.
S. and European government had to intervene to “bailout” these banks. To conclude, the financial crisis in 2008 provided the significance of banks in an economy. When the largest banks in an economy undergo a crisis, its effect are stimulated to smaller banks and it is being expanded to other countries. Thus, making the problem become a global phenomenon which became the financial crisis in 2008.
Its effects were tremendous and it caused severe damage to U.S., Euro and China economy.