Economic crises tend to occur sporadically virtually every decade and in various countries ranging from Sweden to Argentina, from Russia to Korea, and from Japan to the United States. Each crisis is unique, yet each bears some resemblance to others. In general, economic crises have been caused by factors such as an overshooting of markets, excessive leveraging of debt, credit booms, miscalculations of risk, rapid outflows of capital from a country, and unsustainable macroeconomic policies.
Concerning the global economic crisis of 2007-2009, what began as a bursting of the U.S. housing market bubble and an increase in foreclosures ballooned into a global financial and economic crisis. Some of the largest and most venerable banks, investment houses, and insurance companies either declared bankruptcy or had to be rescued financially. In the automobile industry, General Motors and Chrysler declared bankruptcy and were nationalized by the U.S. government. Many blamed the United States for the crisis and saw it as an example of the excesses of a country that did not practice sound principles of finance.
The global economic crisis brought home an important point: The United States is a major center of the financial world. Regional financial crises, such as the Asian financial crisis of 1997-1998, can occur without seriously infecting the rest of the global financial system. When the U.S. financial system stumbles, it tends to bring major parts of the rest of the world down with it. The reason is that the United States is the main guarantor of the international financial system, the provider of dollars widely used as currency reserves and as an international medium of exchange, and a contributor to much of the financial capital that sloshes around the world seeking higher yields.
The rest of the world may not appreciate it, but a financial crisis in the United States often takes on a global aspect. The financial crisis that began in the United States quickly spread to other industrial countries and also to emerging market and developing economies. Investors pulled capital from countries, even those with small levels of perceived risk, and caused values of stocks and domestic currencies to plunge. Slumping exports and commodity prices added to the woes, pushing economies worldwide into either recession or a period of slow economic growth. As economies throughout the world deteriorated, it became clear that the United States and other countries could not export their way out of recession: There was no major economy that could play the role of an economic engine to pull other countries out of their economic doldrums. The global crisis played out at two levels. The first was among the industrialized nations of the world where most of the losses from subprime mortgage debt, excessive leveraging of investments, and inadequate capital backing financial institutions have occurred.
The second level of the crisis was among emerging market and other economies who were innocent bystanders to the crisis but who had weak economies that could be whipsawed by activities in global markets. These nations had insufficient sources of capital and had to turn to help from the International Monetary Fund, World Bank, and capital surplus nations such as Japan. To cope with the global financial crisis, the United States and other countries attempted to control the contagion, minimize losses to society, restore confidence in financial institutions and instruments, and lubricate the wheels of the economy in order for it to return to full operation. To achieve these goals, countries such as the United States, China, South Korea, Spain, Sweden, and Germany enacted a variety of measures such as:
•     Injecting capital through loans or stock purchases to prevent bankruptcy of financial institutions.
•     Increasing deposit insurance limits in order to limit withdrawals from banks.
•     Purchasing toxic debt of financial institutions on the verge of failure so that they would start lending again.
•     Coordinating interest rate reductions by central banks to inject liquidity into the economy.
•     Enacting stimulative fiscal policies to bolster sagging aggregate demand.
At the G-20 Summit on Financial Markets and the World Economy in November of 2008, participating countries generally recognized that economic crisis was not merely an aberration that could be fixed by tweaking the system: There appeared to be no international mechanism capable of coping with and preventing global crises from erupting. The countries concluded that major changes are needed in the global financial system to reduce risk, provide oversight, and establish an early warning system of impending financial crises. Needed reforms will be successful only if they are grounded in a commitment to free market principles. The extent to which the United States and other countries are willing to alter their financial systems remains to be seen.

What do you think? Does the global financial crisis of 2007–2009 illustrate the economics of interdependence?