The economic and financial crisis from 2008 to 2009, also known as the global financial crisis was considered to be the worst financial crisis since the great depression. Economic and financial crises are mainly caused by two factors: potential weaknesses (vulnerability) and triggers. (Economist, 2016) Though financial crises are bound to happen, the use of previous data can provide a better financial system in the future, allowing economist to make economic predictions.
Keywords: (Potential Weaknesses, Triggers, Predictors)
What are reliable predictors of economic and financial crises?
Potential weaknesses and triggers are the main point of discussion when searching for analytical predictors. Predictors such as domestic credit spikes and currency appreciation are vulnerabilities that can not necessarily cause a crisis but prolong the epidemic once it’s triggered. Past data, meaning any form of information from yesterday until 1792 can reveal patterns in unemployment rates and other reliable data in order to respond faster to a crisis. Though financial crises are bound to happen, the use of previous data can provide a well-tuned financial system to be developed, making an uncertain world more predictable. (Economist, 2016)
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In September 2008, the financial crisis was kicked off due to the U.S housing bubble bursting triggering a huge chain reaction consisting of stock markets crashing and banks being bankrupt. This sent the United States and much of the world into a deep recession (Rocca & Steil, 2018). One reliable predictor that signaled the upcoming recession was the growth in house prices and household incomes due to borrowing. The financial system refers to the people who received loans as subprime homeowners, people who have taken out a loan though their income and savings are subpar. Overleveraged home “owners” default on their mortgages, creating a housing glut that drags prices down further (Kenton, 2019). During this time there were a lot of people “flipping” homes with the money borrowed from the banks. Banks had low interest rates and ineffective policy rules against lending money. As the borrowing continue to rise and houses were being purchased from people who possessed below average credit and little savings, the bubble began to increase in size. Over the next six years, from 2000, the chaos over homeownership grew to high levels as interest rates decreased tremendously, and lending requirements were abandoned. It is estimated that 56 percent of home purchases during that period were made by people who would not have been able to afford them under normal lending requirements (Kenton, 2019). The fast growth in household income and household owners were clear signals that something was going wrong in the financial sector, specifically banks’ lending out money like it grew on trees.
Another reliable predictor can be the vast growth of private sector debt. Private debt is an essential part of economies around the world, but it can be served as a doubled edged sword. As it increases it can bring two problems. One is runaway debt such as the one that caused the financial crisis in 2008. Runaway debt is the amount of money the government is spending instead of receiving, this spending can become out of control hence, runaway. Another problem as private debt raises too high, the economic growth is staggered. The debt places a drag on the economy, raising the GDP (Gross domestic product) percentile between one hundred, to one hundred and fifty (Vague, 2016). GDP is the large sum of all spending within an economy, if private gross domestic product triples the normal GDP this means that average businesses and households have three times more debt in relation to their income. Ultimately causing spending and demand to almost cease, in turn, decreasing the rate at which GDP will grow.
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Describe some achievements and pending issues in context of a global crisis. Are we still in danger of economic and financial crises today?
From the housing market to banking, the government has placed new policies in order to regulate the economy in a more clean and safe way since the 2008 crisis. The government revived the market by putting trillions of dollars into the banking sector as well as Wall Street being able to rebound with average bonuses and salaries while stock payouts are still not where they used to be. The housing market has generally recovered. Prices across the U.S. which fell 33 percent during the recession have rebounded and are now up more than 50 percent since hitting the bottom, according to Core Logic, a global property analytics site. As for pending issues, inequality has grown in percentile and jobs that were recovered are divvied uneven. There are more low-income jobs that are being provided than regular waged jobs and the distribution of wealth is still in favor of the high class.
Concluding, we can expect another crisis to happen. “History shows that there are two things we can be sure of when it comes to financial crises: there will be another one, and the next one won’t be the same as the last” (Bank of England). Data from previous crises can provide predictive patterns that can be used to spot-out when a next crisis may occur.
- Financial Crises (2014, April 10). Retrieved from https://www.economist.com/news/essays/21600451-finance-not-merely-prone-crises-it-shaped-them-five-historical-crises-show-how-aspects-today-s-fina
- Rocca & Steil U.S. Housing-Market Trends Suggest Recession Around Election Time, 2020. (n.d.) Retrieved from https://www.cfr.org/blog/us-housing-market-trends-suggest-recession-around-election-time-2020
- Kenton, W. (2019, March 27). Housing Bubble. Retrieved from https://www.investopedia.com/terms/h/housing_bubble.asp
- Meserve, J., & Vague, R. (2016, September 19). The Private Debt Crisis. Retrieved from https://democracyjournal.org/magazine/42/the-private-debt-crisis/
- Amadeo, K. (2019, June 25). What Caused the Subprime Mortgage Crisis? Retrieved from https://www.thebalance.com/what-caused-the-subprime-mortgage-crisis-3305696
- Meserve, J. (2016, September 19). The Private Debt Crisis. Retrieved from https://democracyjournal.org/magazine/42/the-private-debt-crisis/
- England UK, B. (n.d.). Will there be another financial crisis? Retrieved from https://www.bankofengland.co.uk/knowledgebank/will-there-be-another-financial-crisis
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