The causes that lead to the crisis and discuss how it has affected the Essay

The causes that lead to the crisis and discuss how it has affected the New Zealand financial system and economy - Essay Example However, even wealthiest governments were forced to declare diverse rescue packages in order to bail out and thereby ensure the safety of their financial systems. The decade witnessed a series of collapses in the American banking sector, which were directly attributed to the crisis. The most challenging issue associated with the global crisis was that the institutions responsible for the financial difficulties were the ones being largely bailed out. This paper intends to explore the major causes that led to the crisis and how it affected New Zealand’s financial system and economy. Facts of the financial crisis Davies (2009) says that the financial crisis widely struck the global financial markets and its first impacts were seen in the United States’ sub-prime mortgage market. As a result of this crisis, the prices of bonds and other financial assets were considerably declined by which the generated losses largely hit the financial system. In the view of Davies (2009), i n this period, number of financial institution underwent bankruptcy mainly due to the collapse in credit; this situation adversely affected the economic confidence of business houses/entrepreneurs and thereby the overall economic growth of nations. A gigantic expansion in credit and asset prices just prior to the collapse increased its severity. This adverse credit as well as asset price expansion was more visible in the housing markets of US. Davies (2009) points that the situation of immense global imbalances between corporate giants created huge reserve accumulations. The aftereffects of these accumulations led to the fall of real and nominal interest rates. Naturally, this economic condition produced an environment that offered excess liquidity and very easy credit; hence, borrowers began to take advantages of this favorable situation. Subsequently, companies also increased their leverage with intent to exploit the situation. In the view of Davies (2009), households got the oppo rtunity to borrow more and more under this economic situation; and consequently, the ‘household debt rose to unprecedented levels in relation to GDP’. The banks and other financial institution were willing to approve this increased demand for credit and allowed credit even to vulnerable and very risky borrowers. Obviously, this massive and thoughtless credit creation hurt the financial stability of the credit sector. Causes of the global financial crisis Prior to the emergence of global financial crisis, it seemed that America had struggled with productivity and competitiveness in the Asian markets. The speculative economy has also notably contributed to this financial turbulence since the relationship of the international money supply did not commensurate with the actual production of goods. We know that energy consumption significantly increased by the beginning of 21st century. Since the existed reserve levels could not meet the increasing energy requirements, it cau sed energy crisis. Scholars opine that this energy crisis has also played a vital role intensifying the crisis. Davies (2009) argues that the irresponsible and passive trade room practices have also contributed to the crisis. Many of the economists are of the opinion that severe feeding problems or food crisis are also factors that fueled the global financial crisis. However, the major cause of the 2007 global economic crisis can be directly