Economic Crisis Research Paper Example | Topics and Well Written Essays - 2000 words

Economic Crisis - Research Paper Example Eventually, critical evaluation of the policies is exercised in order to execute cross evaluation procedure and suggestion of optimal policies are being stipulated in order to strengthen the policy implication paradigm. The propulsion of the economic crisis in 2008-2009 is the devastating economic crisis that the world faced in the past six decades. The crisis was predicted by a host of economists but it was mainly unforeseen. In the World Economic Outlook, the International Monetary Fund (IMF) even inferred that the threats to the global economy are minimal and for the moment there were no anticipations of any severe economic downturn. The juncture before the crisis was infested with widening global imbalances but owing to the virtue of the world’s largest capital markets and its stable financial regulation and political stability, they saw the global imbalances with sustainability angle. Apart from that the emerging developing countries also found a secure place for investin g their funds in order to earn a huge benefit so that they could sustain their position and enhance their credibility in the debt market in the long run. The United States was also considered to possess a superior monetary policy institutions and monetary policy and monetary policy making environment. But the world economy was shattered with the launch of the economic crisis and the crisis shook down the roots of the formidable US economy (Verick & Islam, 2010, p.v). The evil effects of the crisis led to the shattering down of the trade scenario of the world economy with the plight of tremendously declining unemployment rate of the developing economies and subsequent rescue efforts of the government. Launch of the crisis The global economic crisis emerged in September 2008 following the collapse of the strong US financial institution, the Lehman Brothers with the result of the accumulation of the defaults on the mortgages and the derivative products (Lin & Treichel, n.d., p.7). Imme diate impact The financial sector crisis very quickly led to the significant decline in the credit volume in the private sector as well as sharp rise in the interest rates. The equity market crashed and the real growth rate around the globe declined significantly below the projections and the US along with the developed economies. The only exception was China and developing Asia who maintained robust growth (Lin & Treichel, n.d., p.8). The root causes The microeconomic dimension Real estate bubble burst The primal reason for the outburst of the crisis was the bubble burst in the US real estate market. As the house price falling rapidly in the second quarter of 2007, the growth rate of the prices of the real estate saw a declining trend since 2005. In the late 1990s, the housing prices began to rise sharply and deviated from their fundamental characteristics. Reaching the summit in April 2006, the bubble burst rose heavily with the tightening of the monetary policy of the Federal Res erve. With signs that the exaggerated rise in the real estate was coming to an end, the banks decided to issue NINJA loans which were made without any prior income declaration from the borrowers to start paying off debt. With the intensification of the downturn in house prices, the mortgage