The global financial crisis of 2008-2009 was triggered in the US as a result of the bursting of the US housing bubble. This was precipitated by the increased defaults of subprime mortgages where banks encouraged homeowners to take on high loans hoping that they would be able to pay them back quickly while not taking the prevailing interest rates into account. The increase in interest rates leads to many homeowners defaulting on their mortgages leading to foreclosure. This then resulted in housing prices reducing significantly making refinancing the mortgages hard and leading to a slump in the housing market. Several financial institutions had securitized these loans and sold them as mortgage-backed securities. When the housing bubble burst, the mortgages that backed these securities were worth less than the houses and were foreclosed on leading to a drain of wealth from consumers as banks were no longer able to provide credit to the economy. The effect of the foreclosures and the losses made by investment banks that had invested in the mortgage-backed securities spread to the rest of the US economy and later on into the world markets with the effects being felt as far as UAE and Europe.
The global financial crisis of 2008/ 2009 originated in the United States and this is where the greatest effect was felt. The US accounts for about a third of the world’s consumption. This consumption was fuelled greatly by the US citizens spending too much money that they did not have i.e. they had to borrow to spend. As a result of the global financial crisis, there was less money in circulation in the US and as such consumption slowed down.
This affected other countries around the world as their goods did not sell as much and hence GDP dropped. Remittances by foreigners living in the US to their home countries, which account for a large portion of GDP in some countries also reduced significantly. Oil is a major export for the UAE accounting for about 37 percent of its GDP. Due to the global financial crisis, the price of oil which had reached very high proportions due to speculation in the past came tumbling down due to the reduced demand hence affecting the UAE’s GDP significantly. The housing market in the UAE was also affected as foreign nationals who had been actively buying property were no longer able to afford the houses. Several of the banks in the UAE especially the US-based banks had liquidity problems which in turn led to less money circulating in the UAE economy.
There should be better monitoring of the financial system and all the players involved in the sector. Regulators should be empowered and encouraged to regulate the sector to ensure the integrity of the system. In addition to regulating banks, the shadow banking system i.e. the investment banks and hedge funds should also be monitored and regulated. Moving forward from the economic and financial stimulus packages that governments around the world put into place, it is vital that countries focus on growth and full utilization of their capacity to ensure that their economies remain strong and vibrant.
The impact of the global financial crisis is not yet over. Several countries around the world are still struggling to get to the GDP growth rates that they experienced before the crisis. European countries notably Greece and Italy are facing tumultuous times with their economies under great duress and their banking industries strained by the lack of credit.