Causes And Consequences Of Current Financial Crisis

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INTRODUCTION TO CURRENT FINANCIAL CRISIS: A large number of people are still unaware with the term financial and credit crisis. From an Economist view point, a financial crisis occurred when a conflict disordered the money supply and wealth of the economy, or in laymen terms it can be said that, when a shortage of cash and liquidity prevails in the economy, it is referred to as financial or credit crisis (Krugman, 2001). The term financial crisis is applied to a number of scenarios or situations where the financial institution of a country abruptly looses a large part of their asset. The world suffered enormous number of severe financial crisis after the World War II but not a single one resulted in shrinking the world economy in an offense, like the current financial crisis did. Before the arrival of the current financial turmoil, the world’s economy as a whole was stagnate and was moving with a good pace. Almost all the economical indicators like balance of payment, Foreign Direct Investment (FDI), trade surplus, consumer price index and underestimated unemployment rate showed green signals in the long run for the economy. In July 2007, confidence of the people tumbled from the real estate market and mortgages, known as sub-prime mortgage crisis, from there the U.S market plunged in a severe recession. The mortgage crisis hit badly, the two biggest mortgaging firms Fenny Mae and Fredrick Mac and suppressed them to be default. Because of the default of the two giant mortgaging companies, the moral and confidence of the investors tumbled and the people were reluctant to invest in the real state sector, then the cash shortage occurred in the market in the year 2007, which pushed more industries towards the brink of bankruptcy (Appelbaum, 2009). In September 2008, financial institutions of USA suffered a severe loss first time after 2 to 3 decades, and urged the

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