Crisis Management: The 2008 Financial Crisis and the Present COVID-19 Crisis

Crisis Management: The 2008 Financial Crisis and the Present COVID-19 Crisis
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Crisis Management: The 2008 Financial Crisis and the Present COVID-19 Crisis
The 2008 Financial Crisis
It has been over a decade since the most significant financial recession of recent times. The financial crisis which began in mid-2007 escalated from a burst in the real estate and more so, the housing bubble in the United States (U.S.) to be one of the worst recessions the entire globe experienced in more than six decades (Islam & Verick, 2011). Initially, it was an isolated event, which could be regarded as mild instability in the sub-prime segment of the country’s real estate sector (housing market). However, it was underestimated as it led to the fall of major institutions such as the Lehman Brothers and more surprisingly, the collapse of national economies such as Greece (Mitsakis & Aravopoulou, 2016). The Lehman Brothers’ bankruptcy conveyed that there was more to the story beyond the implication of poor incentives, which were provided as the primary reason for the financial crisis.
Loose Monetary Policies
Besides the poor incentives from financial incentives, the Federal Reserve (Fed) accounts for a considerable share of this problem for the loose monetary policies. These policies trackback to 2003-2005 and were the major reason that the bubble was that extreme. Over the turn of the 21st Century, two major events occurred on American soil that was directly linked to the economy. First, there was the collapse of the tech bubble in 2000. The following year, 2001, the country experienced the 9/11 terrorist attacks. In the quest to avoid a recession as a result of these events, the Fed slashed interest rates to extreme levels of 1% (Allen & Carletti, 2010). At the same time, housing prices were rising steadily. A decrease in interest rate was a major incentive as it gave people significant borrowing powers. Consequently, they would purchase houses whose rates were going up rapidly. Public policies such as tax advantages including deductible interest on mortgages encouraged people on the lower economic spectrum to buy houses. Demand for houses rose profoundly. Even though the Fed began raising interest rates in June of 2004, people continued borrowing as lending rates were much lower relative to the appreciating of houses until 2006.
Progressive Interest Rates institutionalized by the Fed (Islam & Verick, 2011).
In this regard, the first factor that contributed to this course was the Fed’s low-interest-rate policy. The same factor was apparent in Spain and Ireland thereby justifying the bubble witnessed in these countries (Taylor, 2009). Similarly, these countries had loose monetary policies.
Global Imbalances
Global imbalances earmarks as the second most influential factor in the ensuing asset bubble prices and therefore, financial crisis. Global imbalances facilitated the growth in credit. In essence, this factor is one complex issue implying that the research will borrow a leaf from the Asian crisis of 1997, which comprised of Indonesia, Thailand, and South Korea. South Korea for instance, had borrowed substantial foreign currency compelling them to turn to t...