Global Economic Crisis in Action

Global Economic Crisis in Action

Global Economy crisis.


2.1 Brief background

The financial crisis, erupting in the US financial markets in the mid 2000s, quickly spread to other financial institutions in Europe and the world especially in china.the crisis that was initially thought to be only for the rich countries but later spread to other countries that are consider to be third world countries. This apparently favorable equilibrium was underpinned, however, by three trends that appeared increasingly unsustainable as time went by. First, real estate values wererising at a high rate in many countries, including the world’s largest economy, the UnitedStates. Second, a number of countries were simultaneously running high and risingcurrent account deficits, including the world’s largest economy, the United States. Third,leverage had built up to extraordinary levels in many sectors across the globe, notably
among consumers in the United States and Britain and financial entities in many
countries. Indeed, we ourselves began pointing to the potential risks of the “global
imbalances” in a series of papers beginning in 2001.2 As we will argue, the global
imbalances did not cause the leverage and housing bubbles, but they were a critically
important codeterminant.
In addition to being the world’s largest economy, the United States had the
world’s highest rate of private homeownership and the world’s deepest, most dynamic
1 Bernanke

Initially, because of three factors, many had hoped that the African countries might be spared the fallout from the crisis: first, the crisis originated in the financial sector of the United States whereas African banks had limited exposure to US-originated securities; second, the initial expansionary fiscal and monetary policies implemented by US and European governments were sufficient to stimulate their economies to prevent a slump in demand and a decline in aid to Africa, and third, given the expansion...

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