Financial Crisis

The Financial Crisis

Introduction:

The global financial crisis has emerged in 2007, and finally took place in 2008. It first started in the US, and then spread to other areas in the rest of the world. The financial crisis has influenced people’s lives a lot, which brings a big change to the world. The worldwide financial crisis receives considerable publicity among people all over the world. I write this report to analysis the factors and influence of the financial crisis connecting to the macroeconomics theories.

1. The Causes and Impact of the current financial crisis.

•A period of good economic times in the world.

After World WarⅡ,there is a prospect economic time in 1945 to 2008. The global world development achieved a great change. Along with the coming Third Technology Revolution, more and more countries find their ways to adapting technology in economic development. In addition, the change of industrial structure also makes a big change. The rapid development of the third industry boosts economy a lot. As the graph shows, the world Real GDP increases 3.3% in average.

•Great amounts of money in the world.

The financial markets of every country are closely related, thus creating a global financial market. The liquidity of money is quickly and flexible in the world financial market, that is, money can flow one country to another very quickly. Under the circumstance of the global financial market, one country can borrow money from another to make more money.

•Investment choices between bonds and mortgage loans.

There is low bond rate in the financial market, so bank are more willing lend money to public. From 2001 to 2004, the bond rate remains between 2%. Such low bond rate makes banks prefer to lend money to public. So the money supply goes up, at the given amount of money demand, the interest rate goes down.

There is low interest rate in the financial market, thus high demand of money among people. As Olivier Blanchard puts, low interest makes the costs of borrowing money decrease. There is news reported that, from 2001 to 2003, the Federal Reserve Board was keeping reducing the interest rate, making the interest rate decreases from 6% to 1%. Thus it makes the demand of loans increase, and they put money into investment.

•The global financial markets.

Thanks to the global financial market, though the Federal Reserve Board has not enough money to lend, it can borrow money from other countries, such as China, to lend money to people.

•Investors are happy and they gain more mortgages.

Since the interest rate is low, investors are happy