Impact of Global Financial Crisis on Economic Wellbeing: A Case of South Asia

Abstract

The financial crisis that began with problems in the subprime mortgage market in the USA and spread around the world in September 2008 marked the first global financial crisis of the twenty-first century. After the Second World War, it is considered as the most severe financial and economic crisis the world has witnessed. The devastating impact on the balance sheets of many of the leading investment banks, despite the “virtues” of transferring risk from bank balance sheets under the “originate and distribute” model of banking, quickly propagated across major financial centers. In an attempt to reduce the large counterparty credit risk, banks began calling in loans, including those in seemingly riskier emerging markets. The credit squeeze and the ensuing impact on real estate and housing asset markets led US firms and households to reduce spending, resulting in a sharp economic slowdown. The first-round effects gave way to a second round through slower export demand, further weakening global economic growth. The economies that were highly integrated with US economy suffered much owing to the contraction economic policy of the US government.