Macroeconomic and Causes of the 2007-2008 Financial Crisis

Causes of the 2007-2008 Financial Crisis
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Causes of the 2007-2008 Financial Crisis
The world economy has experienced crises therefore the financial crises are not new news not only to the economists but also to the world as a whole. The last financial crisis that occurred may not be the last one, there might be others coming. However, the last 2007-2008 financial crisis was considered to be the worst crisis ever since the Great Depression of the 1930s due to a combination of several factors. The world’s financial sector has become more complex making it difficult to control its actors. It has become more difficult to control the financial institutions and its products as well. In several instances, the internal control of these institutions have failed now and again. This paper will review the 2007-2008 financial crisis and discuss its causes and whether the United States of America is headed to the right direction.
The 2007-2008 crisis began at the USA home market where home prices peaked in 2006 and then experienced a drastic drop increasing low income lending. The losses in the home market exposed the weaknesses that were present in the financial markets (Norgren, 2010). Despite the efforts by the central banks to control the problems, it escalated and found itself in the real world economy through the financial and economic channels. Countries that had weak policies were suffered the most than those that had strong economic policies. The causes of this crisis can be explained by the macroeconomic policies. However, the root cause of the problem can be traced back to failures in the United States’ financial system. Also, it could have been as a result of the economic policies that were pursued by other countries.
Macroeconomic causes
Low inflation and low interest rates
Before the crisis emerged, most countries entered into the world trade that led to the supply of low cost labor to the economy. Also the advancements in technology led to a decline in production costs for most companies and the world nearly became a potential production center with most different products being produced almost everywhere. Most countries adopted monetary policies that kept the inflation rates low. Low inflation rates results in low interest rates. With low interest rates, borrowing by individuals to purchase homes became easy and the prices peaked substantially (Norgren, 2010).
Higher risk taking
The low interest rates made invest...