The 2007-2009 Global Financial Crisis: A Research Synthesis

The recent global financial crisis is considered by many economists to be the worst financial crisis since the Great Depression. A common view by experts is that the asset price bubble in the US triggered the crisis. This thesis is descriptive in nature and the main purpose is to determine whether the global financial crisis is largely due to the laissez faire or free market capitalism, which led to expansion of credit causing an unprecedented asset price bubble. The objective is to provide a descriptive analysis of the events and to give an overview of the instruments and institutions that were in the center of the financial turmoil, using previous research on the crisis as a framework. The author starts with an overview of the developments in the US mortgage market, the securitization process, the development of structured finance instruments, and the institutional settings surrounding the mortgage related financial instruments using Minsky’s “Financial Instability Hypothesis” as a framework. Following the structural overview is a timeline of major events during the crisis, and a case study of the sovereign bankruptcy of Iceland. The case of Iceland is to provide an overview of the country’s implementation of free market reforms in the 90s, which unleashed an unprecedented credit boom causing a collapse of the nation’s entire economy. The information is gathered to provide an overview of the events and to help identify the causes of the crisis. The author argues that the financial crisis was not caused by a single factor but rather a combination of factors, with the government’s laissez faire approach embedded in the system decades prior to the crisis as the main underlying culprit. Keywords: Global Financial Crisis, Financial Instability Hypothesis, Asset Price Bubble, Free Market Capitalis