The Global Financial Crisis, commonly shortened to ‘GFC’, was an international period of recession and economic difficulty that peaked in 2009. It was considered the worst crisis to hit the global economy since the Great Depression in the 1930’s. Around the world unemployment rates soared and consumer spending dropped, credit markets dried up and real estate dropped significantly in value because of lack of borrowing despite the low interest rates set to increase borrowing.
The Global Financial Crisis began mid to late 2007 when a major bank (BNP Paribas) suspended three funds which invested in US sub-prime mortgages1. Because nobody knew the extent of the losses or how many other banks were involved, trust between the banks was lost and the banking system came to a halt because banks stopped dealing with each other. A year later when Lehman Brothers went bankrupt people became scared about the stability of the financial sector and began pulling their savings and investments out of their banks, which couldn’t afford the sudden demand. The US government was forced to inject vast sums of money into these banks to stop them from all collapsing. Despite the banks being saved, the economy went into immediate recession.
Obviously with such a sudden downturn in the US economy, being the largest in the world, the international business cycle was heavily affected. Unemployment rates in America rose to 10.2% and growth in GDP rates dropped to decline in some parts of the world in 2009 as shown in the table below. The price of assets dropped dramatically as well, where on occasion people owed more to the bank for an asset than the value of it.
The Australian Economy stayed surprisingly strong despite the overseas mayhem, especially in comparison with other Countries. Australian banks continued making profit and were not in need of capital injections from the Government, a remarkable achievement. Still, the effect of the Global Financial Crisis did not go unnoticed. Unemployment rose 2 percentage points to 5.75% in November 2009 and Economic growth slowed down about half a percentage at the same time. The Australian dollar was at a peak in July 2008 buying 98 US cents. Within a year it dropped over 30% to just under 60 US cents, as shown in the graph on the right. The Australian real estate market
The Australian Government at the time put several measures in place to prevent a similar situation happening in Australia to what had occurred in the US. The first sig…