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The Global Financial Crisis

Each significant change in the world results in some form of reaction from public. Natural disasters can be used as a great example. When a major earthquake occurs, while coping with its consequences, people are simultaneously working on systems that can be used for the future prediction of similar disasters. These predictions could decrease the damage and save human lives. Very comparable systems exist in the world economy. After the crisis of 2008-2009, which had a negative influence on the world’s major economies, the idea of early-warning systems and methods to foresee the crisis appeared. Independent countries as well as international unions, such as G10, engaged in the analysis of systemic risks and the ways they could be predicted. Thus, the ability to foresee a situation gives a possibility to decrease the damage it can cause. Unfortunately, first predictions of the crisis were made in the scholarly circles, and this information was not properly delivered to the authorities and the public (Kotz). Nevertheless, the case of 2008 financial crisis has proved that although its consequences and significant influence on national economy could be predicted and partially prevented, both people and the national government were not ready to believe in the scope of approaching downfall.

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Recently, the economy of the United States, as well as the global economy, has gone through a number of complicated stages. The Financial Crisis of 2007-2008 has destroyed many economies. Although the United States has managed to survive the global crisis, the country is still getting over an economic downfall often compared to the Great Depression. The recent debt crisis brought the nation on the edge of default and one more time gave the U.S. citizens a strong feeling of uncertainty and economic insecurity. 

Despite the rapid growth of the developing countries and the slowly shifting axes of power on the world arena, the United States economy still remains the largest single national economy on the globe. The country’s economy has a huge potential, which incorporates massive work force, high buying potential, significant natural resources, manufacturing capabilities, trading scope, etc. In fact, the United States is one of the countries that have been steadily developing its potential since the Great Depression that happened almost 100 years ago. Therefore, the country could have been considered one of the strongest economies in the world.

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Regardless of the country’s potential, the country’s economy was far from its best recently. The United States was the first to be hit by the economic crisis in 2007 (while it took it at least a year to reach other countries), and the country is still getting over the consequences of the downfall. The unemployment rates still skyrocket, and the long-term unemployment has reached its all-time low mark. The GDP is growing although at a very slow pace. Moreover, as the downfall was the global one, international economic environment remains weak and unstable. Thus, instead of a fast recovery after the crisis, the US has just begun the slow and painful process of economic healing.

The reaction to the recession could have been slow due to the delay reaction of the government on the new state of economic affairs in the country. The clearest explanation of such unhurried actions was provided by Summers who compared the response to crisis situation in a country to 5 stages of grief. Only the last stage is an adequate response to the situation and further development in new conditions. Thus, in case of 2008 crisis, the U.S. government has come through several stages (starting with denial) before it accepted the fact of nation-wide economic crisis.

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Some political factors have complicated the economic recovery. The two major points one should note while examining the influence of the U.S. politics on the nation’s economy are the growing expenditures on the national level and the recent debt crisis. The debt crisis gave a possibility to doubt the growth of the U.S. economy. It has also revealed that despite the positive changes that have occurred since the recession, politics can be a major restraint in the process of the economy’s healing.  

Macroeconomic factors have significantly influenced the slow reaction of the United States towards the economic crisis. However, the behaviors of individual citizens also played a significant role in the process of ignoring the upcoming disaster. One should speak not only of the irresponsible economic behaviors but also of the overall positive and optimistic disposition that was carefully bred in the citizens of the United States. Ehrenreich examines in detail the negative consequences of American optimism, one of which is the lack of interest and thus ignorance in some spheres of knowledge that speak of negative consequences of actions. Consequently, the U.S. population for a long while was not ready to accept the scale of the economic crisis. Using Summers’ comparison of the crisis reaction to the five stages of grief, one can state that American citizens have been in denial for a very long time.

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Although it would be unfair to claim that the country is currently in depression or recession, the recovery is still very slow. The downfall was a fast and harsh one but, instead of having a consequent economic boom, the United States is currently facing a very complicated return to the healthy economy. Therefore, while making any significant decisions and planning the future steps in business development, one should consider some challenges that the current economic situation has created.

The global financial crisis of 2008 was economical and manifested in 2008 in the form of deterioration of major economic indicators (GDP, output, investment, inflation, exchange rates, etc.) in most countries. The subprime mortgage crisis in the United States was the predecessor of the 2008 financial crisis. Reduction of the number of home sales in early 2007 was the first sign which further escalated into a subprime mortgage crisis (Koller). Pretty fast credit problems were experienced even by the reliable borrowers. Gradually, the mortgage crisis was transformed into a financial one and affected not only the United States. By early 2008, the crisis has become global and began to manifest itself in the production decline, reducing commodity prices and demand, and rising unemployment. In order to understand the causes of the global crisis of 2008, it is necessary to understand its features. The crisis of 2008 as well as the crises of the past years originated in the financial sector, as if specifically, its roots lie solely in the stock market. For this reason, the real economy was almost unaffected. This crisis is not unique and has many similarities with the crises of the past but with all that has certain characteristics.

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One of the notable features of the current economic crisis was its predictability. It could be expected. However, both the global economic system and the various governments were not prepared for it. Actions taken and immediate resources available were not sufficient to combat crisis. It was one more time in the economic theory when the government sought to treat the symptoms but not the disease. Disease in this case was the separation of the financial sector from production, fiat money, real assets that have intrinsic value, and the lack of standards in the monetary and credit relations.

The obvious fact is that the financial crisis in the US has grown into a global one. Signs of the global crisis of 2008 include a consumption boom in the US, which has led to the fact that commodity prices reached their all-time highs. The world's largest economy had a mortgage crisis followed the bankruptcy of banks, insurance companies, and the collapse of the market. States to adopt quickly to nationalize the financial sector, major banks, insurance companies and investment companies have turned to the state for help. In chain reaction, the victims of the financial crisis in the US were Europe, Japan, and Russia.

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This crisis did not become a second Great Depression, as experts believe but still reminded of it. In the years 1992-99, the United States experiences a significant economic growth. Investment increase significantly outpaced revenue growth (Ferguson). The stock market was flying straight up, and 50% of the population was involved in stock market operations. In 2000, Bush came to power. From May to June 2003, the key interest rate in the US has dropped from 6.5 to 1% (Ferguson). Cheap money had to work, and banks have found a use for them. Unreliable, having a bad credit history and low-income, Americans for the first time were lucky to take out a loan to buy a house.

The most important point was that cheap credit was enjoyed not only by those who had no place to live. Credit was constantly abused, and there was a nation-wide tendency towards avoidance of credit card bill payments in the United States (O'Neill and Xiao). Loans were also taken by speculators hoping to sell a house (Koller). Consequently, the financial behavior of ordinary U.S. citizens was quite reckless and uncontrolled (O'Neill and Xiao). If at the beginning of the 2000s, the share of the Dow Jones did not exceed 10% of the total number who have taken mortgages, by the beginning of 2007, this figure had risen to almost 25% (Ferguson). In general, in the end of the crisis in the United States, mortgages were issued in the amount of $3 trillion while nearly 1.5 million Americans have announced their personal bankruptcy or were on its verge in the near future.

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After the mortgage, problems have arisen for the investment banks that took the opportunity and bought mortgage bonds. The fact is that the bank issuing the credit for housing immediately insured its return, often selling debt at a discount to other financial institutions. Insured deposits gave their owners visible stability although they did not have any positive influence on the overall market discipline (Peria, Soledad, and Schmukler). By the beginning of the crisis, mortgages were packed to capacity investment portfolios of the world's largest investment banks, including European ones. Therefore, the crisis quickly spilled outside the United States. Holders of mortgage securities that lost payments due to unscrupulous borrowers sought to implement the mortgaged property; however, the provision of mortgage loans was much lower than the cost of debt. Next mortgage crisis triggered a liquidity crisis in American banks. Due to lack of cash, banks stopped lending to the real sector of the economy and consumers. One of the first victims was the automotive industry sector. The world's largest steel producers had to reduce their production from increased unemployment. In short, overproduction and consumption boom have resulted in the change of rising prices and a sharp drop in demand. The USA as the whole world have faced the overheating of the stock market and the growing number of virtual financial instruments that had no real basis (derivatives). The global economy depended on one reserve currency, the dollar. Low interest rates on loans and credit market were overheating. Taken together, these factors caused the 2008 financial crisis.

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The global financial crisis of 2007-2008 was the greatest financial tragedy in many decades. This time, the crisis covered not only several countries but the whole world, thus becoming the first global financial crisis in history. It started in the United States and spread throughout the world. The US remained one of the most significant economies on the global scale despite the rapid growth of Asian market and new economies. Another significant characteristic of this crisis was that it could have been predicted, as well as its consequences could have been minimized. However, the conclusions on the possible scale of the crisis were made mostly in the scholarly world and were not adequately introduced to the authorities and the people. The government as well as the population were not ready to believe in the scale of the crisis and reacted slowly, which did not minimize the crisis aftermath to the adequate extend.

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