Global Financial Crisis

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Global Financial Crisis & Its Impact on Developing Countries

Globalization and Financial Crisis

The global financial crisis began in summer 2007 because of "subprime" mortgages made to the American middle class. Under normal circumstances, an individual who wants to buy an apartment can borrow based on salary and ability to repay. Drawback of the system: the loan is proportional to salary. If you do not earn much, you cannot borrow a lot, so you cannot buy (Demsetz & Lehn, 2005, p. 1167). The Americans have created subprime: you take what you want (even if the salary is not very high) but the house is collateral. Clearly, if you cannot repay, the bank gets the house and sells it. But when property prices fall, banks are panicking! Classic scenario: a borrower fails to repay more, the bank decided to sell his house and all recovered. But as property prices fell, the bank loses money on the sale. This is the subprime crisis: that some banks had been too used to this type of loan have found themselves in a critical financial situation. And more than 2 million people find themselves ruined the United States, unable to repay loans, the financial crisis hurt America very badly and most of the economies depend on the economy of America, so that the crisis went globally (Kang & Shivdasani, 1997, p. 56).

The question to be asked is not how old globalism is, but rather how thin or thick it is in space and time. Thin globalization can provide an economic and cultural connection between trading partners, and traded goods impact only a small number of consumers (Jensen, 2002, p. 855). In contrast, thick globalization engages large and uninterrupted long-distance flows, affecting the lives of many consumers (Gillan & Starkes, 1999, p. 345). For instance, the 2008 and 2009 operations of global financial markets had an ill effect on everyone, mainly because globalization is the process by which globalism become increasingly thick (Boyer, 2000, p. 298).

Consequences of the financial crisis

All banks are affected because of the securitization

In an attempt to limit the risks of these funds for a new genre, the bankers have used securitization. They have transformed these loans as the stock market. Specifically, if an individual borrows EUR 1000, he must pay 1200 Euros to the bank with interest. To earn more money quickly, banks have issued debt securities, that is to say a paper entitling the 1200 Euros. These debt securities are traded on stock exchanges (Davis & Greve, 1997, p. 27). What is the attraction for buyers of these securities? If the purchaser acquires title to 1100 Euros, he knows he is guaranteed to receive 1200 Euros. However, from the time he must repay the loan for the purchase of his house cannot pay, the title is worthless. These are complex financial arrangements behind the stock market collapse since all foreign banks, mainly European, realized they had subprime securities were worthless. Everyone had but nobody really knew ...
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