Regulatory Failure and the Global Financial Crisis

Regulatory Failure and the Global Financial Crisis

An Australian Perspective

Edited by Mohamed Ariff, John H. Farrar and Ahmed M. Khalid

This fascinating book presents a lively discussion of key issues resulting from the recent financial crisis. The expert contributors explore why the global financial crisis occurred, how it destroyed wealth, triggered mass unemployment and created an unprecedented loss of control on employment, monetary policy and government budgets.

Chapter 7: Cost Consequences to the Economy and Finance

Ahmed Khalid

Subjects: economics and finance, financial economics and regulation


Ahmed Khalid 7.1 INTRODUCTION The global financial crisis (GFC) led to a high price being paid to stabilize the economies and to serious consequences for some 60 national economies. Originating from the alleged meltdown of the real-estate sector mainly from sub-prime loans (apparently) in the United States, the crisis led to the collapse of some major financial institutions around the globe. The negative impact of the crisis was felt in the developed, emerging and developing countries although the sources of the impact varied across groups. This chapter provides a detailed analysis of the impact of the crisis on the real sector of the economy. The precursors for the GFC may be traced back to a date as early as the 2000s, when the target rates by the Federal Reserve Bank in the US were extremely low, as low as 1 per cent, and returns for investors collapsed, prompting investors to seek higher returns in alternative markets via newer but riskier financial products. Since then, multiple factors including the housing market, changes in monetary policy and regulation of policies governing the banking and financial institutions and new technological development led to an increase in both demand for and supply of credits as well as the exposure of investors to higher risk investments. The root causes and so the origin of the GFC have been traced and explained in an earlier chapter of the book (see Chapter 2). The focus of this chapter is to understand and then analyse the costs and...

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