The U.S. credit crisis and its implications on global economy

Abstract

Stemming from the subprime mortgage market, the credit crisis started early August in 2007, and it was not before long that it spread to other segments of the U.S. and global equity and financial markets. The crisis has, either directly or indirectly, affected the financial sector and real economy of all countries that are steadily embedded in world economy. At the same time, inflation pressure is rising due to high energy and food prices and other factors. The Federal Reserve, the central bank of the United States, now faces, along with other central banks, the conflict of risking accelerated inflation while fighting recession, whereas actions against inflation could increase the probability of economic slowdown. Against this background, central banks are contemplating which of the two “devil's alternatives” carries the least risks and implications. The measures taken by the Fed in recent months have been aimed at avoiding recession. The rest of the world cannot escape the impacts of the financial crisis and the growth deceleration or slowdown of the U.S. economy, either. The first part of this essay exhibits the reasons and phases of the credit crunch, and also the crisis management requirements. The second section provides an overview of measures taken so far to tackle the crisis and their limitations. The third part analyses the effects of the credit crunch on global economy and Hungary, and the fourth chapter offers some general conclusions.