Global Financial Crisis – What Caused it and How the World Responded

The financial crisis of 2007-2008, known as the global financial crisis, marked a dark time in our country’s economy. Here’s our breakdown of what caused it and how the NZ Government responded.

What caused the Global financial crisis?

The global financial crisis (GFC) began in early to mid-2007 when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. In response, the US Federal Reserve injected a large amount of capital into financial markets.

By September 2008, the crisis had worsened as stock markets around the globe crashed.

The housing market in the US suffered, as many homeowners who had taken out sub-prime loans found they were unable to meet their mortgage repayments. As the value of homes plummeted, a number of borrowers found themselves with negative equity.

As a large number of borrowers defaulted on their loans, banks were faced with a glut of repossessed homes and land worth less than their original mortgages. During this time, home loan lending became seriously constrained.

What were the effects of the GFC?

As the fallout from the housing and stock market collapse worsened, governments around the world struggled to rescue giant fiscal institutions that continued to face serious liquidity issues.

How did NZ respond to the GFC?

The NZ Government announced a number of policy changes, including cuts to personal income taxes, cuts to business taxes and infrastructure spending aimed at jump-starting the slowing economy.

In August, the NZ Treasury announced that the country had entered into a recession. The economy declined by 0.3% in the first quarter of 2008, as demand slowed for New Zealand’s exports.

By April 2009, the Official Cash Rate (OCR) had been slashed by 5.75 percent to 2.5 percent.

What has happened in New Zealand since the GFC ended?

Fortunately for New Zealanders, the recession here was relatively small compared to overseas, and, in 2009, the economy began to pick up. From 2010, the economy continued to grow, driven by the rebuild following the Christchurch earthquakes and recovery in domestic demand.

However, more recently, COVID-19 and the government’s response had a huge impact on the economy, the fallout from which is still negatively affecting the nation’s finances in the form of high inflation and an elevated OCR.

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About the author of this page

This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.

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