The rate of private homeownership and the world’s

The Global Financial Crisis (GFC) of
2007-09, from time to time is referred to as the Great Depression 2.0, has advanced
from its origins in the sub-prime mortgage sector of the United States to having
an influence on almost every country globally. The
crisis could be credited to the persistence of large global imbalances, which
in turn were the consequence of long periods of excessively loose monetary
policy in major advanced economies such as, the US and China before the financial
crisis (Mohan 2007; Taylor 2008). Further to being the world’s largest
economy, the US had the world’s highest rate of private homeownership and the
world’s inner most dynamic financial markets. Since the 1970s, there has been progressive
deregulation of the financial markets, in which were confronted via the use of a
fragmented and ineffective system of government prudential oversight (Obstfeld
and Rogoff 2009).

Though it is not appropriate to restrict
our understanding to the sub-prime mortgage problem nor interpret it as the financial
sector’s fault. In essence, it was caused by the bursting of an international
credit bubble, which is a marvel generated by a mixture of the rise in asset
costs and the increase in credit and leverage (Shirakawa 2008). Nations across
the world have responded quickly and effectively to the Global Financial Crisis
to ensure global financial stability through a variety of measures and to
financial institutions, especially since the Lehman failure. Governments over
the past decade have employed various fiscal strategies and stimulus packages
to combat the economic downturn (Chhabra 2009).

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The rest of the paper are organised as follows.
A brief outline of main causes of the Global Financial Crisis in section 2, the
description of the main monetary and macroprudential policies in section 3 and the
analysis of the effectiveness of these policies in section 4. Section 5

aforementioned, the origins of the GFC stems from the sub-prime mortgages of
the US, where housing prices started to decline and created the opportunity for
uncreditworthy homeowners to own a house. These sub-prime mortgages were pooled
together into what is known as Collateral Debt Obligations (CDOs). CDOs are structured
securities providing high returns via the repackaging of multiple cash
generating assets into discrete tranches, in which are sold onto investors (Chhabra

However, this was
not the only cause of the GFC, as any large event will always consist of many
other causes. I would like to focus on three causes, in which are: the level of
misperception of risk management, the level of interest rates and the deregulation
of the financial system.

of the foremost basic underlying motive of the GFC was the human psychology of perception
of risk management. When stability is established, risk perception dwindles and
people begin to believe that stability can continue indefinitely. However, once
the cycle takes a turn for the more extreme, risk aversion increases far beyond
the norm (Ellis 2009).

1 depicts the investors perception of risk and the transitions of their
perceptions over the years leading up to the crisis. Before the early year
2000s, the emerging market bonds were perceived as risky, however over the
years they became increasingly narrow to the US government bonds, which were considered
safe as the chances of default were very slim. Subsequently, from 2005 the
spreads widened out as the perception of investors became more risk-averse,
thus seeking other safe investments.