What were the reasons for the global financial crisis of 2007 and why did it burst out?
The financial crisis of 2007 is said to have been the worst financial crisis since the great depression in the 1930’s, and its effects can be still felt today. The crisis started in the United States during the years before the crash in 2007; this was partly due to the US interest rate rising from 1% to 5.35%, which triggered a huge halt in the US housing market. Due to the interest rate hike, many homeowners were not able to keep up with their mortgage repayments, they soon began to default, and at the same time the value of their property was falling. They were stuck as they couldn’t afford to keep up the repayments but also they couldn’t sell either. Some of these loans were leaned by banks to customers known as “sub-prime” borrowers, i.e. people who were deemed as being higher credit risk and less able to repay their loans. The default on these loans caused a liquidity crisis. Many of these sub-prime loans had been bundled up and sold on to banks and investors. However, in a speech given by the deputy governor of the bank of England he said, “The roots of the crisis lay in global imbalances in trade and capital flows between advanced and emerging economies. The rapid growth of exports from Asia, and latterly the Gulf, was reflected in a substantial build-up of savings. In China, the national saving rate peaked in exceeded 50% of GDP”.