Question

What was the cause of the domino effect and how did it rippled through the different international financial markets during the financial crisis?

Answer 1

The Global Financial Crisis of 2007-08 applied brakes on the economic growth across the world. Almost every country in the world was negatively affected by it.

Interestingly, the crisis started with the fall of Lehman Brothers because of poor quality of sub-prime mortgages, it defaulted, one of the largest bank in the U.S.-- Why did the crisis snowball into the largest economic crisis since 1929 not just for the U.S, but for the entire world ?

The answer lies in the domino effect that the crisis had.

The U.S. is world's largest economy by nominal GDP, and there is virtually monopoly of U.S dollars in international trade and commerce. Most of the countries' debt( Sovereign as well as corporate debts ) is also denominated in U.S. dollars

Being the most prominent and most used currency U.S. dollar is most preferred option for issuing debts. Once the crisis hit, the US. markets went down steeply. Most of the investors fled away with the money from the emerging markets to the U.S. Extreme shortage of funds across the world made the economies go into recession for want of funds.

The Federal Reserve Bank, the Central Bank of the U.S announced the Q.E.( Quantitative Easing ) program, as well as did all other Central Banks of major economies, to make sure that enough funds were there for businesses to grow at a much cheaper rates, with interest rates going down drastically.

After almost a decade we can say that the world has fully recovered from the great financial crisis.New Financial Governance laws have been framed in the banking sector to make sure that these kind of crises could be averted much earlier.