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Impact of Financial Crisis on UK Economy

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Banks which had lent money to them, could not recover their assets and their capacity to lend too dried up. Consumer demand plummeted and this affected producers of goods and services. The result was a decline in the US economy accompanied by a sharp increase in unemployment. The impact of the loan defaults was felt across the global financial system, as many of the mortgages had been bundled up and sold to banks and investors. Soon, the global financial system awash with junk mortgage securities started crumbling.The financial crisis became acute in July 2007. Loss of investors’ confidence in the value ofsecuritized mortgagesin the United States resulted in aliquidity crisisthat prompted a substantial injection of capital into financial markets by the United States’ Federal Reserve,Bank of Engl.and the European Central Bank. Across the world, banks and financial institutions were crumbling due to the liquidity crunch. In the US, some of them like New Century Financial filed for bankruptcy. Bear Stearns and BNP Paribas were unable to pay investors in their hedge funds. Bear Stearns was ultimately bought by JP Morgan Chase with backing from the US Central Bank. Lenders, Fannie May and Freddie Mac were bailed out by the US authorities. Lehmann Brothers collapsed and Merril Lynch was taken over by Bank of America. Insurance giant AIG had to be bailed out by the US government. Carmakers Ford, GM and Chrysler too had to take government support due to the credit squeeze.The global crisis affected Western Europe’s financial systems very badly because of their exposure to foreign financial assets with high levels of risk, particularly mortgage-backed securities (MBS) in the US. Switzerland’s UBS, European bank Dexia, Germany’s Hypo Real Estate and Iceland’s Landsbanki had to be bailed out.