Sample Solution

The 2007-2008 financial crisis was one of the most significant economic downturns in recent history, with catastrophic effects on global financial markets. The crisis began when a U.S. housing bubble burst following years of unsustainable investment activity and rising borrowing costs, leading to a sharp decline in home prices across the country that triggered widespread defaults on subprime mortgages. This chain reaction caused a liquidity crisis in global banking institutions as well as other financial firms due to their heavy reliance on short-term debt financing, resulting in massive losses for investors and creditors alike (Nawaz & Yang, 2017).

The impact of the financial crisis was far reaching; virtually all major asset classes were affected by reduced demand and increased volatility throughout 2008 including stocks, foreign exchange (FX), commodities, bonds, and derivatives (Garcia et al., 2011). Banks worldwide suffered because they had loaned money to borrowers who could not repay it due to job losses or falling asset prices; these banks then experienced severe losses from mortgage backed securities that had been repackaged into complex investments and sold around the world. As fears about solvency spread through international capital markets investors panicked and sold assets at a rapid rate exacerbating market declines further (Boone et al., 2016).