The financial system is the heart of a free market economy. 2007-2008 financial crisis has raised fears that the global financial and economic system can experience a truly substantial collapse. New financial instruments have spread to such an extent that it has become impossible to calculate the market value of many of them, and so it was impossible to know the market value of the institutions that held them, or that guarantee them. The initial crash occurred with the sub-prime lending in the U.S. residential mortgage market, but it quickly spread throughout the world for institutions that introduced new financial instruments associated with these mortgages. Firms that are guaranteed to these financial instruments have found that their net worth has disappeared, leading to concerns about the agencies that rely on the guarantee. Meanwhile, new hedge funds introduced greater risk of volatility, and they are subject to sudden shocks investors. Many banks have been caught in this web and suddenly obtain additional capital to meet regulatory requirements and maintain the confidence of depositors. As a result of these developments, liquidity disappeared from the financial system. It seemed that the U.S. recession is inevitable. Previous expectations that others have "decoupled" to the United States were replaced by fears that the world economy will follow the U.S. into recession. Central banks have reacted strongly to attempts to reduce interest rates and increase financial liquidity, and the U.S. government cut personal taxes through the tax-back program. It was not clear whether the monetary and fiscal policy can prevent a long and deep recession. There was a dispute about whether a wide range of new rules that could prevent future recurrence of such a crisis. "Hide
by David W. Conklin, Daniel Cadieux Source: Richard Ivey School of Business Foundation 13 pages. Publication Date: June 9, 2008. Prod. #: 908N14-PDF-ENG
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