Introduction

The current financial crisis is the worst the world has seen since the Great Depression of the 1930s. For younger generations, accustomed to mild recessions of the new phase of globalization, the misery of the Great Depression is hitherto nothing more than a distant legend. In the new, globalized world of closely interdependent economies, the crisis affected almost every part of the world, receiving extensive coverage in the international media.

Causes

While few predicted the financial catastrophe, almost everyone has an explanation as to why it happened. To economists, it all seems painfully simple. Too much foreign money was flowing into the US from the Asian countries especially China. The availability of easy credit meant that too many people borrowed to buy properties that they could not afford.For the Fed critics, the crisis resulted from Alan Greenspan’s policy of keeping the interest rates low for an extended period of time. Given the ongoing nature of the crisis, many complicated explanations will surface in the years to come.

Effects

The financial powerhouses of Bear Stearns and Lehman Brothers have gone bankrupt and mortgage giants Fannie Mae and Freddie Mac had to be bailed out. Attempts by the US government to save industries led to an increased budget deficit, making some experts predict that the global power epicenter might shift away from the US before the crisis ends. On the other hand, it has become clear that Asian countries need to restructure their domestic economies to encourage consumption.Consumer confidence remains low with fears of a double-dip or an anemic recovery being voiced daily. Some poor countries, insulated from foreign finance, suffered from reductions in tourism, remittances and foreign aid.

Solutions

Economists and central bankers are still struggling to find a way out of the subprime mortgage crisis. If Japan’s lost decade offers lessons, then deflation must be averted at all costs if there is to be hope for a recovery.. But for the long-run, one magical phrase emerges from experts and that's “stricter regulations for the banking industry.” Once governments succeed in restoring consumer and investor confidence, they should focus on designing regulations that encourage responsibility and a long-term outlook. Furthermore, policymakers have to recognize the need for global oversight of the banking industry, either by strengthening existing institutions or by creating new international authorities. One certainty for this crisis: there are no localized solutions for a problem that extends throughout the world.