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The global financial crisis has reminded many of the great depression in the 1920s. The investments banks in the United States have suffered heavy losses and this has had a ripple effect on the rest of the world. Before I go further into the financial crisis it is best to define what financial crisis is. It is when financial institutions see they value being seriously depleted. They are many reasons and assumptions why they occur but there is little consensus. There are various scenarios that can be paced under a financial crisis but in context with the crisis that the world is facing it is called a credit crunch. A credit crunch is where by banks no longer land out money because they fear that they do not have enough cash in their vaults.

The financial crisis that the world is going through started a few years back at least the seeds were sown a few years back. There was a time in the American economy where by the interest rates were at an all time low borrowing money was easy and people could afford to pay what they owe on their mortgage. The low interest rates lead to people taking out more than one mortgage on one house. The big banks also got in on the act as they wanted a piece of the pie banks started lending out mortgages to people who either had a bad credit history or that person was not employed. In other words many banks forwent the minimum requirements for one to take mortgage they did so because the interest rates were low and people could afford to pay their monthly installments.

This went on for some time and as the number of people taking out mortgages grew they are many people in the financial sector that saw theses (mortgages) as a good investment and that is were investment banks like Bear Stearns got into the picture. Banks were now packaging those mortgages into investment packages were by foreign banks could also buy. The foreign banks themselves did not bother to check if the minimum lending requirements were observed. The problem started when the interest rates started to go up and this lead to many people falling back on their mortgage payments. The failure by people to pay their monthly installments led to banks having to reposes those house or cars that people had bought using mortgage money. The effect of the foreclosures is that it flooded the housing market and as the economic theory elasticity of demand goes the more goods in the market the price of that good goes down and so did the prices of houses in America. With the prices of houses going down, the banks when now selling the houses at a lower price than what they needed to offset the debt of mortgage and thus banks were now making losses. The problem escalated when no bank wanted to borrow money because they were all afraid that they did not have enough cash to pay their depositors back as they had lent out the money and got losses.

The banks started having problems because they had to they had to borrow money to pay their depositors and that was no longer possible because no bank was willing to lend money to any other. The banks had to file for bankruptcy with the authorities and the effect with filing for bankruptcy is that it meant that depositors would lose their money. This is bailout talk starts. The United States government had to act because after Bear Stearns applied for bankruptcy many other banks followed suit and this was causing panic in the financial sector and the economy. There were fears that the economy would slip into recession and that would bring a whole host of problems. The Federal Reserve decided to bail out the banks by giving them credit. What exactly happened is that the government was buying shares in the banks that had filed for bankruptcy so it was not like they were being given money for nothing. You as an individual you will know that it is difficult for people for operate without credit and it is the same for major corporations. The causes of the financial crises are complex and varied some of the reasons need some one who is in the profession to understand then fully but I will try and explain some of them. Government policies are a factor, the government of to previous administrations were trying to provide housing to many Americans who id not have by relaxing the rule and regulations associated with mortgage lending. The central bank of America is to blame as well if you look at the history of the central bank they have always been there to react to the problem and never do their try and stop or prevent the problem from happening. The reason why central banks decide to react is because identifying the problems and its symptoms can cause big debates among economists as they all have different views on the economy at any given time.

Financial institutions carry the biggest reasin why in the period from2004 to 2007 these institutions had very huge debts and thus after that they made investments in mortgage bubble all in the hope of getting huge returns all went bust when the interest rates went up. It will shock most people to find out that despite the heavy losses that these firms were making the executives of the firms were being given high bonuses.

The financial crisis has affected a lot of people and the worldwide community. Foreign governments especially in the European Union have to execute their own bailouts so that depositors do not lose their money. The financial crisis has lead to many people debating the regulations of the international financial community and most people are angry at the fact that ordinary people get affected the most and how this can be avoided in the future.