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Is globalization a cause of the present world economic recession?
Wiki User
∙ 13y ago
The world economic recession you are referring to was caused as such:
Banks lent money to people because of low interest rates.
These people often bought property as the money was lent in a mortgage.
As lots of people bought property, property prices rose.
Banks then realised that they could lend to poorer people because even if someone did not pay back all of the money the bank could sell the property and make a profit because the property price has risen.
Banks grouped lots of loans together (the loans were worth money because the people who owned the houses were meant to pay back the loans with interest) and banks bought and sold these packages called "securities" all around the Global Financial system.
Eventually some of those poor people that had been leant to (mainly in Florida) realised they were never going to be able to pay back the money they had been leant.
A combination of large house-building projects, less people wanting housing and some people being declared bankrupt so their houses were sold led to an increase in the amount of empty housing and so house prices fell.
Banks became worried because now if people could not pay back the loans, they could no longer sell the property at a profit.
Because the loans were grouped together with some good and some bad loans and because these securities were not recorded on Bank's balance sheets (accounts) no-one knew which Banks had lots of debt that was never going to be repaid (toxic debt) and which Banks were still fine.
Banks didnt lend to each other all over the world
Banks didnt lend to consumers or businesses all over the world either
Investment and consumer spending fell (Aggregate Demand fell basically)
The economy contracted and unemployment rose.
Recession!
That is what happneed in a very, very rough sense. Who/what then is to blame? The Bankers? The people who were meant to regulate the banks? The government for setting up weak regulation? Those who set low interest rates? Consumers for accepting loans they could never repay? Globalisation?
There is no definitive answer as of yet. Personally I believe that financial regulation should have been higher but to be fair to Governments, any Government that raised regulation was likely to suffer a shrinking financial services sector as companies moved abroad. Thus you could blame Globalisation but I would blame the lack of international co-operation. The two do not have to go hand-in-hand.
Wiki User
∙ 13y ago
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