essay

Question 1

introduction

Answer 1

The Global Financial Crisis (GFC) is known as the great recession because the world experienced the worst economic downturn since the 1930’s which was the great depression. There are many causes and effects of GFC some of them are excessive risk-taking in a favourable macroeconomic environment, regulation and policy errors and the effects are house prices decreasing and spillover to other countries.

Question 2

PARA 1
- lead in
- point 1
- A HM I
- b&l a h r l w m i
- - c

Answer 2

Firstly, excessive risk-taking in a favourable macroeconomic environment resulted in GFC due to assumptions by Americans that housing market prices would continue to increase meaning that they took out immensely large house loans to both buy and build homes in the hope of a lucrative return (this also occurred in some European nations such as Iceland, Ireland and Spain). This caused banks and lenders to authorise high risk loans without meticulously investigating the borrowers ability to repay their debts and competition between individual lenders to skyrocket to new high’s.

Question 3

PARA 1
- point 2
- example
- lead out
- A MBS
- LB s l r b b i m d & h r o t h i a l r
- LB date

Answer 3

Also Mortgage-backed securities (MBS) were sold to large banks across the world as a safe, low risk way to make more money but became increasingly more difficult and high risk over time because they depended more upon borrowers making their payments in time; however it was still presented to investors as low risk. An instance of this is the collapse of the Lehman Brothers investment bank in 2008 when they filed for bankruptcy due to many large investments in MBS. Hence, Excessive risk-taking in a favourable macroeconomic environment played a large role in the GFC.

Question 4

PARA 2

Answer 4

Firstly regulation and policy errors resulted in GFC because of the lack of regulations set in place; these lax regulations led to fraud which became more common but also the guaranteed security of the investments from the Mortgage-backed security (MBS) sellers. A large number of central banks also ignored how mortgage losses were increasing rapidly which further ensued the GFC. An instance of this is the 8 banks that went bankrupt throughout the USA. Therefore regulation and policy mistakes played a large role in the GFC.

Question 5

PARA 3
- lead in
- point one

Answer 5

Lastly, 2 effects that GFC had on the world and USA are numerous borrowers were not able to make their payments for their home loans as house prices were falling. Which resulted in stresses in the financial system for both the borrowers and investors as some banks stopped purchasing MBS leading to the overall worth of MBS to plummet making it harder for banks who purchased numerous MBS’s .

Question 6

PARA 3
- point 2
- e.g
- lead out

Answer 6

Also spillovers to the rest of the world was a result of various foreign banks purchasing MBS also which caused the US house market issues to leak into other countries and affect their economies. An instance of this is Northern rock which is a British Bank that was acquired by the UK government in early 2008. Consequently, the two effects, house prices dropping and spillovers to the rest of the world were directly caused by the GFC