There have been a lot of points presented in the media and elsewhere about the real causes of the financial crisis that we have recently seen. I do believe there is more than one cause for what has happened. However, I also think we should identify the most important causes and put aside those that are minor. If we want to solve a problem we have to get to the root of it and if we take the crisis as a problem we want to solve I believe that excessive borrowing and lending are the main causes of the collapse of financial markets, construction sector and global economy two years ago.

In order to explain why these two elements are the core of the problem we need to understand how global economy functions. I want to compare it with a human being. Every one of us have blood and in order for a person to be alive, blood has to be running through his arteries, veins and blood vessels. If for some reason blood stops running through the vascular system; that person dies. Now, what is that blood in economy? It is money. When money reaches all economic sectors and moves around the entire economy, that economy prospers. If for some reason money stops flowing to some sectors or starts decreasing in all the economic system, that economy experiences a crisis. As you see money is very important for economy.

However, we also have to understand that an excessive amount of money in economy causes an economic boom, which usually leads to crisis. How does that happen? It happens through borrowing and lending. At some point, when the interest rates are low and there is a great demand for certain products in global markets banks start increasing lending and people as well as companies having a unique opportunity to borrow at good interest rates start taking more and more loans. This causes the financial markets and economy to boom. Unfortunately, as the money supply from banks reaches abnormal levels everything starts going wrong. At that point inflation is getting out of control and central banks try to curb it by raising interest rates. A time comes when people and enterprises are not longer able to pay their loans and bankruptcies start.

That’s when banks stop giving loans and suddenly money supply stops. The process reverses. Now money starts getting out of every market sector to banks. There is a shortage of money everywhere, jobs are being lost, and very many industries experience terrible times as thousands of companies go bankrupt. The blood of the global economy is running out and that’s what real crisis is all about. I hope you see now that borrowing and lending can create and usually creates a sudden rise in economy, which unfortunately ends with a severe collapse. That’s why there are so many voices that are against borrowing and lending. And they are right. We need to borrow, but we cannot borrow beyond our means to repay and banks cannot lend without thinking who they are lending to. Let us hope all of us will be smarter next time.

If you want to find out more on similar topics I recommend visiting blog Market trends and reading article Forex factory and moving averages.