Evaluate the reasons for the recent global financial crisis. ( Banking Essay

Evaluate the reasons for the recent global financial crisis. ( Banking and Finance Moudle) - Essay Example The recent global economic crisis has been labelled by economists as the worst economic crisis since the Great Depression and the domino effect of the crisis has culminated in the decline of consumer spending, demise of established businesses in key industry sectors and heightened government burden in developed countries (United Nations, 2009 p.1). Indeed, in the United Nations’ â€Å"Global Outlook: Economic Situation and Prospects 2009†, the United Nations comments that â€Å"it was never meant to happen again, but the world economy is now mired in a severe financial crisis since the Great Depression† (United Nations, 2009, p.1). Moreover, the global nature of the economic crisis has not only had a domino impact on national economies, infrastructure and the retail sector; it has also served as a barrier to quick recovery (Shiller, 2008). In evaluating the causal triggers and reasons for the recent economic crisis, this paper will evaluate the concept of financi al crisis with contextual reference to the current global economic crisis with contextual reference to various academic commentary and discourse pertaining to the reasons for the economic meltdown of 2008. ... Academic and media commentary on the crisis has highlighted the point that the immediate trigger was the collapse of the US housing market as a result of the sub prime market disaster upon which the international banking industry had been lending through following trends in the housing market (Ambachtshee et al 2008, p.149). Indeed, the United Nations analysis of the global outlook for 2009 asserted that â€Å"in little over a year, the mid-2007 sub-prime mortgage debacle in the United States of America has developed into a global financial crisis and started to move the global economy into a recession† (United Nations, 2009 p.1). Furthermore, in considering the interrelationship between the sub-prime crisis and the economic crisis, the contagion effects of sub-prime asset backed collateralized debt obligations are reinforced by results of the empirical investigation undertaken by Longstaff in â€Å"The Subprime Credit Crisis and Contagion in financial markets† (2010). Longstaff utilised data for ABX subprime indexes and found evidence of correlation between financial contagion and the subprime liquidity channels (Longstaff, 2010). However, whilst Longstaff acknowledges that the concomitant impact of the subprime crisis clearly had a direct correlation to contagion effects on other markets; Longstaff’s analysis of the data in his investigation suggests that: â€Å"The ABC Index returns forecast stock returns and Treasury and Corporate bond yield changes by as much as three weeks ahead during the subprime crisis† (Longstaff, 2010). To this end, the findings of Longstaff’s analysis undermine the presumption in pre-existing commentary which argued that the subprime assets were intrinsically flawed and unreliable (Longstaff, 2010). Moreover, Longstaff argues that