THE IMPACT OF THE 2008 FINANCIAL CRISIS ON THE GLOBAL ECONOMY: A REVIEW

Abstract

This review of the literature on the 2008 crisis covers the underlying factors, the effects on developing and developed countries, and the policy measures taken all over the world to tackle the crisis. The Housing Crisis may have occurred in 2008 but the underlying factors causing the housing bubble to burst started appearing at the start of the millennium. The 2001 brief global recession, led to a relatively stable period of growth for US and other developed nations fueled by expansionary monetary policy due to the Feds Fund rate dropping the interest rates 27 times from 6.5% to 1.0% between January 2001 and July 2003. This fast recovery from the recession increased the value of the housing market which soon turned into a housing bubble. During 2002-07 the developing countries were developing at a rapid pace as a result of low inflation and relatively stable macroeconomic policies. The developing countries started this period of growth because of the high demand for exports and increasing commodity prices resulting in developing countries along with increased FDI increasing exports as a share of their GDP from 29% in 2000 to 39% in 2007. The collective GDP of these countries was growing at a rate of 5% during this period compared to 3.4% annual growth in the past 2 decades. The paper also covers the measures taken by developed countries to tackle the effects of the crisis. The efforts taken by the Fed could be split in 2 ways chronologically-steps taken before September 2008 and after September 2008 because of the announcement of $ 700B which later came into effect known as TARP to primarily aid the companies affected by the crisis.