Recently we discussed globalization in class and the 1997 Asia financial crisis. When I learned about how the US government bailed out the countries in economic crisis, I thought of another, more recent, economic crisis that involved government bailouts, the 2008 housing crisis. This made me wonder if these two economic crisis had any similar causes, and if the 2008 crisis could have been predicted by looking at the Asia crisis.
To briefly summarize, the 2008 crisis was caused by banks giving out mortgages to people with bad credit, also known as subprime mortgages in order to build mortgage-backed-security that were in demand as they seemed like a safe investment. However, as subprime lending continued, people started to default on their mortgages, creating a large influx of houses into the market, lowering the value of houses, bankrupting large financial institutions, causing a ripple effect throughout the economic web of liabilities, assets, and risks. What followed was economic recession on a global scale.
It seems that financial crises have similar causes that include risky loans, excessive speculation, and lack of government regulation. Large financial institutions heavily invest into what seems to be stable markets, and are ill prepared for when those markets unexpectedly crashes, forcing them into bankruptcy or government bailouts. Because of globalization, these large institutions have so much influence over the global economy, when they fail, the whole economy goes with them.
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