Causes of the 2008 Global Economic Crisis and Its Impacts on the UK

Economic crises have affected global economies at various times in the past. Of the crises recorded in history, the 2008 financial crisis has been suggested to be only surpassed by the great depression of the 1930s with respect to its adverse outcomes (Krugman 2010). Global economic crises are periods marked with widespread unemployment that results from the inability of the market to provide adequate job opportunities, with their impacts being transmitted to various countries from the country of origin (Colander 2008, p. 202). Just as the preceding crises, aspects such as the failure of financial institutions characterized the 2008 financial crisis a resulting into curtailed financial intermediation (Rotheli 2010). Such curtailed intermediation occurs with the reluctance of financial institutions to provide credit facilities due to losses suffered, following massive defaults on loans advanced, with factors such as loss of jobs or heightened cost of living adversely affecting the borrower’s capacity to service their loans (Rotheli 2010). Due to curtailed lending, entities that relied on external funding for their expansion plans halt such plans, and when this becomes widespread, it ends up stagnating economic growth (Rotheli 2010).

Although economic crises are outcomes of various factors such as prolonged policy misapplication, recessions, on the other hand, are part of the recognised economic cycles in market driven economies. Since in market-driven cycles individuals are availed the power to chose the product, the quantity of such product, and the individuals (or population) to whom such product is to be sold, alternating periods of growth and decline, suggested to take place in cycles, is a core characteristic of market economies (Colander 2008, p. 132; Percy ed. 2006). Accordingly, as part of the business cycle, a recession is said to be “a decline in real output that persists for more than two consecutive quarters” (Colander 2008, p. 134). A depression, on the other hand, is a prolonged recession, with more severe effects than those envisaged for a “normal” recession that forms part of the business cycle (Colander 2008, p. 134). With the great depression of the 1930s one of the economic schools of thought – Keynesian Economics – that advanced the role that the government should play to reduce the severity of a recession, arose.

The USA economic crisis has been one such crisis that has exemplified causes, impacts and government interventions used in depressions. Although the origin of the crisis is suggested to have been with the failure of the mortgage market (Financial Crisis Inquiry Commission 2011, pp. xx), subsequent disclosures have suggested far more contributors such as unethical corporate governance, prolonged policy misapplication, and insufficient regulatory framework (Financial Crisis Inquiry Commission 2011 Drawbaugh 2010; Kirkpatrick 2009; Weiss & Larson 2008; Larson 2007). The impacts of the US crisis have been widespread, ranging from the collapse of financial institutions (e.g. Lehman Brothers, and AIG) and other large firms (e.g. General motors) to massive layoffs (Financial Crisis Inquiry Commission 2011; Rotheli 2010). To avert the failure of some of the institutions, government interventions included massive public bailouts, whose impact has been widely debated (Medley 2009; Weiss & Larson 2008; Larson 2007).

The subject of this paper is to review the causes of the 2008 global economic crisis, its impacts on the UK and assess how the UK can overcome the crisis. To achieve this purpose, under the causes of the economic crisis, the role of credit crunch (badly sold debt), increasing prices of houses, goods and services, and over application of government policies will be considered. With regard to impacts, the paper highlights the impacts of the crisis on employment levels, income disparity (gap between the rich and the poor), and international trade (exports and imports). Subsequently, the paper will evaluate solutions that could alleviate the crisis in the UK.

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