A study of the financial crisis

Abstract

The Global financial crisis has entered its second year and transformed into a general loss of confidence in the global financial system. The onset of the crisis in 2007 followed an extended period of unusually low interest rates, easy credit conditions, low volatility in financial markets and widespread increases in asset prices that generated large scale but hidden vulnerabilities and risks. Despite the success of the various policy measures undertaken by the governments across the world, the market environment has remained fragile, suggesting that the process of normalization is uncertain and likely to be protracted. So far, the crisis has developed in five distinct stages, starting with the subprime mortgage-related turmoil between June 2007 and mid-March 2008. Following this first stage, during which the primary focus was on liquidity, bank losses and write downs continued to accumulate as the asset prices continued weakening. As a result, in the second stage of the crisis, from March to mid-September 2008, funding problems grew into concerns about solvency, giving rise to the risk of outright bank failures. One such failure, the demise of Lehman Brothers on 15 September, triggered the third and most intense stage of the crisis: a global loss of confidence, arrested only after unprecedented and broad-based policy intervention. Stage four, from late October 2008 to mid-March 2009, saw markets adjust to an increasingly gloomy global growth outlook amid uncertainties over the effects of ongoing government intervention. Stage five, beginning in mid-March 2009, has been marked by signs that markets are starting to show some optimism in the face of still largely negative macroeconomic and financial news.