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What Caused The Financial Crisis?

The global financial crisis is “a crisis of credit markets”, says Malcolm Edey, Assistant Governor (Economic) of the Reserve Bank of Australia.

In an address to the Foundation for Aged Care Business Breakfast in Sydney, Edey traced the origins of the financial crisis, discussed its effects and looked at responses to the crisis.

Text of Reserve Bank Assistant Governor Malcolm Edey’s speech:

I’ve been asked to talk this morning about the current financial crisis: where it came from, and the effects that it’s having on the economy.

What we refer to as the global financial crisis is, at its core, a crisis of credit markets, centred particularly in the United States, the UK and Europe, but with significant spill-over effects to the rest of the world.

Over the last year or so, financial institutions in the major economies have reported losses on a large scale. Some of these institutions have become insolvent, or have had to be taken over or rescued by their governments. Associated with all of that has been a massive swing in the appetite of world financial markets for risk, and in their capacity to accept risk. The result has been a shift from easily available credit to tight credit. [Read more…]