The questions below are of a generic nature Essay

The questions below are of a generic nature - Essay Example However, according to many experts the situation is not yet under control. The world is still passing through the worst economic and financial times. Stock markets are showing sluggish movements and recently there have been sharp decline in the international stock markets. Large financial institutions have collapsed which has been the biggest shock to the financial world. Rescue of these banks have involved huge amounts of money for bail outs. The government of the respective countries have provided lump sum amount of money (that have run upto many trillion dollars in the United States alone) to these failed banks for rescuing them. In the United States the Federal Government has followed the Keynesian theory of economics. As recession set in, policymakers have not left the economy to the forces of the market that might autocorrect the market and improve the condition of low aggregate demand. They have intervened with fiscal and monetary policy changes, so as to augment economic acti vities in the country. Interest rates were reduced as an immediate response to the crisis (Velde, 2008). This paper looks at the causes of the GFC and the responses of the government to this crisis. The main aim of this article is to research the protectionist activities of the governments in reflex to the harm caused to these economies by recessionary pressure. In this light the preventive measures of the governments have been studied to understand the course of action adopted by the global economy to prevent the recurrence of a situation similar to the Great Depression of the 1930s. Causes of the GFC The causes of the GFC are manifold and analysts have not come to any particular agreement about the actual reasons that have eventually led to the financial crisis of such a huge dimension. Yet it is commonly agreed that GFC has occur due to the combined effect of the shocks faced by the real estate market in the United States and the European countries on one hand, and the increasing risk premia for the corporate firms and the investment banks on the other (Stoeckel, 2009). The shocks in the global financial market have potentially created strong contractions in international trade. The root to the financial crisis can be traced to the collapse of a number of large and influential financial institutions in the United Sates and the Europe. Among them, the most notable mortgage bank failures are Lehman Brothers, Northern Rock and Bear Sterns. As these banks filed for bankruptcy, a wave of apprehension ran through the most established financial markets of the western world. In this situation, banks curtailed their lending facilities to other banks which increased the risk premium on interbank borrowing. This rate increased steadily from near 0 to 5 per cent. On corporate bonds this risk increased to more than 6 per cent. In spite of efforts by the government to increase liquidity levels in the market, the financial markets crashed inevitably. The economic slowdown started with the shelving of big corporate projects. Therefore, the primary borrowers in the economy (i.e., the large corporate firms) stopped lending money from the banks. On other side of the coin, obtaining credit for commercial purposes became difficult. This causes the great financial crisis. Since credit facilities dried up, corporate firms had to revise their investment decisions. They faced a