Why did the global financial system meltdown in 2008 Essay

Why did the global financial system meltdown in 2008 - Essay Example The increase in the number of bad loans led to devaluation of company assets and the benchmark indices plunged as a result of the erosion of investor confidence. This effect spread across other economies of the world. The national production levels, imports and exports lowered which gave rise to reduction of consumption demand. The fall of consumption in the economy again pulled down the productivity levels thereby forming a vicious circle which prompted appropriate actions from policymakers for economic recovery. Overview and key rational concepts:Â  global financial system meltdown and relevant issues of world economy The global financial meltdown that occurred in 2008 had its root in the economic crisis in US. The economic crisis in US started with the crisis in the housing markets of US. The prices of the housing market were steadily increasing during the middle period of the 1980s to 1990s. The investments in the housing market were lucrative as the investors in real estate and housing properties could realize multiple values of their initial investments within a short period of time. The investment funds were borrowed from the banks and financial institutions. The banks and the financial institutions also observed that their loans could earn them interest repayments in short time and the underlying mortgage properties were also of high value in the market. In the plight of higher growth in short span of time, the financial institutions lacked due diligence while assessing the credit parameters of the borrowers. The policies of the US government also influenced such activities in the market as every citizen of US had a fundamental right of holding housing property. This phenomenon led to the formation of a housing bubble. Due to lack of tighter credit policies, the income level of the borrowers and their past credit history were not fully checked. This caused the housing bubble to burst when the borrowers at one point of time were not able to repay the lo ans. The crisis situation occurred when the weight of bad loans increased beyond proportions (Kates, 2011). The financial institutions and the corporate houses which held the housing properties as underlying mortgages incurred heavy losses as a result of the bad investments. The share prices of the companies including big names like the Lehmann Brothers fell and the shareholders’ wealth was eroded in quick time. This led to a huge crisis in the economy of US that created the financial recession in 2008. The economic crisis in US is also referred to as the subprime crisis. The losses that occurred in the housing market is referred to as subprime because this market had a relatively lesser adherence to credit parameters for lending and included borrowers who could not avail loans from the prime house lending market. The economic crisis slowly and gradually spread to other economies as well and the global financial system was hit by the economic crisis (Allen, 1999). This was th e age of economic reforms by developing countries like China, India which led to its integration with the world trade. The international economy was heavily dependent on the exports and imports of the countries all over the world like US, UK, Canada, countries of the European Union, Middle East, China, India, etc. The economic crisis in US led to the fall of consumption demand and productivity in the economy. As a result of this, the exports and imports of the country hampered which in turn affected the imports and exports of other countries all over the globe. Thus the effect of economic crisis melted down to the economies as well