Contents

• Introduction to the financial crisis 2
• Causes and results of the financial crisis 3
• A low interest-rate environment 3
• Demand for high-yielding assets 3
• Faulty risk assumption and due diligence process 3
• Complex Structuring and Investment Vehicles 4
• Role of Ratings Agencies 4
• Principal- Agent divergence 4
• Regulatory Issues 4
• Lack of Transparency 4
• Monetary policy during crisis: Interventions and Implementations 5
• Measure A 5
• Measure B 6
• Measure C 6
• Monetary policy effects 7
• Microeconomic Impact of crisis: The travel and tourism industry 8
• Price 11
• Utility 11
• Opportunity Cost 11
• References 13

Description

The recent crisis in the global economy started brewing in 2007. The financial crisis started with problems related to the credit market with its origins in the US subprime mortgage market. Because of the integrated nature of the global market, this extended to markets in North America, Europe, Australia, and Asia. The general economy has taken a hit too with tightened credit conditions for all types of loans since then. The contagion effect has since then spread from the credit market to other financial segments of corporate and consumer credit markets affecting leveraged buy-out loans (LBOs), auction-rate securities, credit cards, and loan disbursements. There have been strings of bankruptcies and failures of financial institutions. Affected parties include money market funds, commercial paper market, hedge funds, investment vehicles etc. The banks have taken large hits on their balance sheet and face liquidity challenges. Figure 1 gives the snapshot of losses at these banks. These problems at banks have been widespread in the US and affected few in the UK and mainland Europe. The credit crisis has led to serious deterioration of confidence in financial institutions and thus the premium required by the banks has gone northwards to raise funds.