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Global Financial Crisis – What Caused It And How Did Economies Respond?

The Global Financial Meltdown

It was the summer of 2007 in one of the richest countries in the world. United States investors lost confidence in sub-prime mortgages, causing a problem with liquidity. The United States Federal Reserve Bank then moved to try to stop the issue by pushing a very large amount of money into the financial markets. Just over a year later, in September of 2008, stock markets throughout the word would crash and turn extremely volatile. Three years later at the time of this writing, economies around the world are still feeling the after effects of this crisis. Though they are starting to show improvements, people are still feeling the shocks.

Sub-Prime Mortgage Crisis and the Housing Bubble

The sub-prime mortgage crisis came to a head when the US housing market was dealt a great blow as many home owners who took out a sub-prime loan came to the painful and startling realisation that they could no longer handle their mortgage payments. This lead to foreclosures and a drastic decline in home prices. These borrowers would then find themselves with negative equity, owing more on their homes than the houses were actually worth.

This, then, lead to many more people defaulting their loans. Banks then had the problem of having land which they could not sell for the amount of money that they were losing on the deal. With the loss of enormous amounts of money, the banks were no longer able to give out the loans they normally could have, even to credit-worthy borrowers. This particular event is known as the credit crunch.

The Crisis Goes Global

When Lehman Brothers collapsed on 14 September 2008, it would mark the beginning of the official global financial crisis. Governments throughout the world were scrambling, and struggling, to help keep their largest financial institutions afloat. The effects of the housing and stock market collapses continued to worsen and things got worse. Most of these institutions were still having a very serious problem with liquidity concerns. The Australian government would move quickly to push out a stimulus (the first of many) package to help breath new life into a quickly slowing economy.

A $700 billion plan from the American government was proposed, but it was shunt down in Congress when they Congressmen balked at the thought of spending so much taxpayer money to save Wall Street. In the eyes of many of the taxpayers, the Wall Street investors and bankers were the entire reason the financial crisis was even happening, and they didn't want their money helping them out.

In September - October of 2008, many had started to invest very heavily in bonds, gold, the US dollar and even the Euro currencies, believing that these investments were much safer than the hard hit house and stock markets.

America's new President, Barack Obama, would propose a major plan to spend about $1 trillion dollars to help to fix the state of the crisis. Australia would propose yet another stimulus, this time giving cash to the tax payers and spending more money on infrastructure projects for the Australian people.

Australia's Response - The First Stimulus

The major problem in Australia's economy as the time of the GFC was inflation. Then prime minister Rudd and Treasurer Swan would offer a budget directly responding to the crisis, aimed to fight the inflation that was working to destroy the Australian economy.

October of 2008 would see the Rudd government announce that they would begin guaranteeing bank deposit accounts. The economy was facing recession and there was a stimulus package announced with the price tag of $10.4 billion. This would include payments from the government to seniors, their caregivers and their families. Just in time for Christmas of 2008, the money made it to families and most retailers would report very strong sales. The government would also double their first home buyer's grant, totalling $14,000 for an existing home and tripled it for new homes, bringing the total to $21,000.

The Second Stimulus as the Crisis Moves On

In 2009, there was a second, much larger stimulus announces by the government of Australia in February. This stimulus would see $47 billion dedicated to staving off the tide of the global financial crisis:

  • Schools would see $14.7 billion dollars worth of government aid.
  • 20,000 new homes would be financed with $6,600,000,000 worth of government (taxpayer) money.
  • $3.9 billion was spent insulating around 2.7 million houses.
  • $890 million was spent on various infrastructure projects such as road repairs and paving.
  • Small business were given about $2.7 billion worth of tax breaks.
  • $12.7 billion were offered in cash bonuses.
  • Any taxpayer earning less than $80,000 a year was given an extra $950 that was paid between March and April of 2009.

The Worst of the Crisis: Are We Immune?

There were many financial experts who said that the economy of Australia had been more insulated from the effect of the Global Financial Crisis than other countries. The sub-prime crisis and the aftereffects hit America and many European (and other) countries very hard. It is true that Australia has not been hit quit as hard as some other nations. However, Australia isn't immune and is still feeling the affects of the crisis. Not only are they very real, but they may not be over yet and the problems may yet get worse. The housing market in Australia has slowed and unemployment is currently rising. The issue began as a local economic issue in the United States of America, but it quickly spread throughout many countries around the world and, to this day, is still continuing to have an effect on the economy of the entire world.

Many believe that America and the rest of the world have already weathered the worst of the crisis. Some are saying the massive government stimulus spending could come back to haunt our future generations. At some point, that debt will need to be repaid. Hopefully, we're all ready for it when that time comes.

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