What were the causes and effects of the global financial crisis in Essay

What were the causes and effects of the global financial crisis in 2007 and three clear leasons for portfolio risk management that have emerged from this experience - Essay Example The financial crisis of 2007-2009 caused disastrous effects in the US economy as well as numerous other countries of the world. The effects have been so severe that the world still struggles to return to normalcy. The crisis is considered to have planted its roots since as early as 2001. This is the time when United States of America recovered from a minor recession due to the terrorist attacks and the dotcom bubble. Dotcom bubble was a stock market recession that took place due to the heavy investments in the dotcom companies. Many investments were made in the technological companies with the expectancy of gaining even greater profits. The US economy survived this setback in their economy but their minds feared the probability of an actual recession. Singh (2007) stated that the Federal Reserve decided to decrease the interest rate to 1.75% from a rate of 6.5% to avoid any occurrence of a recession. This lowering of the rate proved to be an attractive package for the people as many more individuals could finally make their dreams come true and make desired investments. What the concerned authorities did not predict were the consequences of such an increase of loans and mortgages. Due to the decrease in the interest rates, the people became restless buyers and started applying for more mortgages and loans. The demand for houses appreciated the property prices to a great extent and lowered rate for rented properties. A greater element of encouragement was introduced in the market when Federal Reserve lowered the interest rate even lower to only 1% in the mid of 2003. This was done with the aim of keeping the economy strong. Singh (2007) stated that this rate was the lowest one that was witnessed in the past 45 years. This gave an even bigger push for the people to invest as much as they possible could. Then, another factor was introduced in