What Caused the Global Economic Crisis ?

The previous article in the module introduced the global economic crisis with a brief overview of the causes. This article looks at the causes of the global economic crisis in depth.

For starters, the global economic crisis carries a distinct “Made in the USA” tag which means that the origins of the crisis are to found in the reckless lending and risky banking practices of Wall Street.

1. The first aspect is the building up of toxic derivatives on top of the subprime housing market which meant that once the housing market went bust, the financial securitization and the derivatives that were based on the housing market blew up leading to banks being unable to lend to each other and suffering losses.

   What exacerbated the situation was that the globalization of the world economy meant that the crisis was not restricted to the United States alone and hence the world economy took a beating as a result of the crisis.

2. The next aspect is the fact that Americans and much of the rest of the world were deeply in debt (personal, corporate and governmental) which was unsustainable.

   The point here is that if one lives beyond one’s means, sooner or later the debts come due and the financial reckoning day would mean that one is either forced to pay up or go bankrupt.

   When this happens at the individual level, it usually results in foreclosure of homes, being declared bankrupt and hence unable to pay the credit card bills etc.

   When this happens across the economy and involves corporates, banks, governments (local, regional and national), and the net result is a credit crunch which in other words was the name given to the global economic crisis.

3. The third aspect to the crisis is that growth cannot proceed ad infinitum in a world of finite resources. Thus, as skyrocketing petrol prices and food prices were on display in the summer of 2008, individuals and families were left at the mercy of market forces forcing a full blown crisis of market led growth.

   The point here is that we live in a world of limited resources and hence the paradigm of growing forever needs a rethink as there are limits to which we can use the resources. This is another aspect of the crisis which has been noted by some commentators.

To sum up, there was a convergence of different forces (economic, social and political) which resulted in a “perfect storm” of economic and social calamity. Hopefully, the crisis should serve as a warning to policymakers to promote sustainable business practices and for individuals and families to not live beyond their means.

The bottom line for any debt based economic system is that one can only postpone the day of reckoning but cannot go on forever in the expectation that the debts would not come due.

In conclusion, this article provided a detailed description of the factors that caused the global economic crisis and the subsequent articles would look at the various casual factors along with some recommendations on how to resolve the crisis.