The Global Financial Crisis in the Developed Countries - Assignment Example

? Business Assignment [Full [Email Address] [Mobile Number] Identification Number] Introduction The recent global financial crisis hasled the world in a shaken state as governments all over the world look for ways to manage and curtail further financial crisis. As the financial crisis hit the world, analysts all over the world went into frenzy over finding the cause behind the origin of the crisis. The financial crisis may have begun from the United States and its inability to manage its banking sector but it soon hit the entire world due to globalization. The financial crisis that began in 2007 crippled many businesses and affected nearly the entire world. While financial crisis in the economy is inherent to a great extent, the current financial crisis began as a result of the state being unable to manage the risks associated with the wish to produce better yields. As the entire financial institution began to collapse with the bankruptcy of the Lehman Brothers, the government failed to take any preventive steps to control the situation. The steps that were taken were more reactive in nature and thus failed to be truly effective. According to an estimate by IMF, the total global financial loss suffered by the recent crisis amounts to 2.2 trillion US dollars1. In this paper, we attempt to understand how different countries over the world reacted to the financial crisis by implementing their own state regulations. These countries include USA, UK, Russia, Japan and China. The paper would work on a critical analysis of the regulation imposed and whether they brought about the desired impact. Reasons behind the Global Financial Crisis The Global Financial Crisis, that impacted the entire world, originated from the United States. The financial system within US backfired as a result of lack of risk management practices. The main contributor of the financial crisis was the subprime mortgage loans that were made available to the public without proper control and management. Mortgage companies were forced to relax their policies in order to increase their own shares in the market by increasing loans to the buyers. Also the Clinton government pushed for providing more loans to low and medium income families. As mortgage companies increased loans to buyers, they failed to ensure that the loans were given to deserving parties who would repay the loans on time. As mortgage companies failed to collect their loans, the number of bad debts increased to alarming numbers2. The capital that flew from the mortgage companies was provided by investors who gained confidence in the companies as a result of the rating provided by the credit rating agencies. These credit rating agencies took to taking money from mortgage and other financial institutions to provide a better picture of the organization. Also the credit rating agencies provided advice to such clients on ways to improve their rating by structuring securities to suit their own position3. It was this manipulation of the financial standards that subsequently led to the fall of the financial institutes within US. As US banks began to suffer losses and filed to bankruptcy, it impacted the rest of the world since US is the main guarantor of the financial world globally. Impact of Global Financial Crisis The global financial crisis though began from United States impacted the whole world. The most disastrous impact of the crisis was perhaps on the financial sector. Banks all over the world filed for bankruptcy including some of the biggest financial institutions such as the Lehman Brothers. Even though the IMF, World Bank and stable governments came up to help their own local banks and also banks in the emerging economies, but still capital was reduced to a great extent. This impacted the flow of capital in existing and new businesses around the world. Also as banks around the world were either closing down or merging into bigger institutions, the confidence of the consumers in the financial market was negatively affected. As banks and other financial institutions around the world went into capital deficient, investors took to liquidating their assets from some of the biggest financial institutions and thus escalated the financial crisis to bigger proportions. The value of the dollar slid downwards as a result of the crisis. Since the US dollar is the main guarantor of the financial systems and the currency is an exchange currency around the world, it means that economic crisis within the US will slowly move towards the rest of the world. This did happen and while the industrialized nations took domestic help, the developing countries had little hope but from the IMF to provide further loans. As the confidence of the consumers in financial institutes fell drastically and the interest rates on loans increased considerably, the emerging countries suffered quite a bit. Emerging countries, by taking loans from the industrialized nations, enjoy economic gains in this world of globalization. But with the apparent financial crisis, emerging countries were unable to take loans4. Need for State Regulation of Global Financial System The recent global financial crisis has brought up the question of the need for regulation of the financial sector. Since the current financial crisis began as a result of lax policies for financial institutions, the situation demands a more stringent control over the banking system. The US government, backed by the Congress, has taken up steps to prevent such actions in the future. Along with this, other countries impacted by the financial crisis have taken heed from their current mishap and taken to regulating their financial sector. The G-20 Summit discussed in detail the need for state regulation to prevent future crisis and the importance of global management of accounting standards. State Regulation of the Financial System is imperative in order to ensure that individual parties and corporate structures do not attempt to bend accounting standards for their own good. The current financial crisis brought into question the concept that individuals work inherently for the good of the society. In the capitalist world of today, entities and individuals both work for their own benefit. State Regulation would ensure the accounting standards necessary to preserve stable economy of the country are met. State Regulation after the financial crisis is also imperative so as to ensure that the market is stabilized and that the confidence of the consumers and investors in the financial system is maintained. As banks all over the world filed for bankruptcy, it was the governments of the industrialized nations that took to improving the situation by either merging institutions or by providing capital to them. Regulation of the Financial Crisis The recent financial crisis has impacted both the developed and the emerging economies. The crisis first impacted the developed countries and slowly moved on the developing or under developed countries. In order to cope up with the damage of the crisis, the G-20 nations conducted a meeting whereby they decided to take a global action in order to deal with the financial letdown. The action plan developed in the meeting dealt with seven major issues. These included dealing with the apparent weaknesses in the prevailing accounting standards; improving the standards of credit rating agencies; insuring a minimum limit of credit for banks and firms; improving risk management practices among financial institutions; better information sharing globally and improving the participation of emerging countries for better financial stability. The action plan in order to regulate the financial crisis has worked on a four phase program. The first phase deals with the core of the issue and that is the prevention of collapse of the financial institutions and to ensure consumer confidence in the financial market. The government has done this by rescuing certain financial institutions that are perceived as the foundations of trust in the financial market. The rescuing has been done by working on mergers and acquisitions and by the guaranteeing of bank deposits. In the second phase of the plan, the leaders dealt with stabilizing the impact on the macroeconomic level specifically among the emerging economies by taking help from organization such as IMF. The World Bank and IMF have provided billions of capital to emerging economies including Pakistan, Iceland, and Ukraine etc. The third phase deals with bringing about changes in the existing financial standards and systems to prevent future economic crisis of such kind. The main idea is to look for long term solutions through a collaboration of G-20 leaders. The standards developed would be recommended to all countries since they would be developed keeping in mind the global impact of such standards. The fourth phase of the action plan is focused on the impact of the crisis on social and political conditions around the globe. Since social and political impact is to be expected, it is only fitting to deal with the issue in a collaborative manner. State Regulation and Financial Crisis in USA The global financial crisis that began in 2007 originated from United States and impacted the whole world. While financial crisis beginning from other countries remains localized, the financial crisis from US impacts the whole world. This is because the US is the main guarantor of the global financial system as the US currency is hallmark for foreign currency exchange. Also the United States by beginning the financial turmoil has to some extent tarnished its position as one of the financial leaders of the world. In order to deal with the financial crisis, the Congress has come to the fore front. The Congress has actively working on improving the financial standards and going away with weaknesses within the system. State Regulation and Financial Crisis in Japan The impact of the financial crisis on Japan is slightly less severe than that suffered by certain Western countries including US and UK. This was because Japan had been quick to take action against the financial crisis through risk management practices such as Basel II. However, Japan too did suffer from the after effects of the financial crisis. The shares of various organizations fell sharply and the country began to move towards negative growth in terms of economy. In order to cope up with the situation, the Japanese government in collaboration with the Bank of Japan took different measures in order to control the negative impact of the financial crisis. Japan implemented the Basel II regulations in March 2007, according to which financial institutions had to set aside a prescribed minimum limit of capital in order to prevent going into bankruptcy. The prescribed minimum limit is set in direct proportion to the risk that the bank incurs. This means the higher the lending amount in the bank, the greater the minimum limit. Basel II protected Japan against the Domino effect that was to be expected as banks across the globe were moving towards bankruptcy one after another5. Just like other countries, the Japanese government worked on the long term solutions for the financial crisis. They did this by providing capital to certain deposit-taking institutions through governmental funds. Also accounting standards within the country were put under scrutiny and improved upon. Japan focused its attention of revising standards so as to improve transparency in accounting standards along with improving the risk management practices in the financial institutes. Also credit rating agencies were put under intense analysis as they were enforced with the responsibility of winning the trust of the investors in the financial system. The confidence of the investors was also improved through deposit insurance system. Since the government of Japan had a strong position, it explored the possibility of public administration of the financial system in times of crisis. In such situations, public funds would be used to save the bank against bankruptcy and to possibly nationalize the bank. State Regulation and Financial Crisis in Russia Russia has a unique economy due to the fact that it is counted both as an industrialized nation as well as an emerging economy. Even though Russia is a booming industrial nation, it still depends on other industrialized nations for help. This includes help to manage its financial sector. Domestic loans within Russia have too high an interest rate to be feasible for the corporate world. Thus in order to finance endeavors within the business world, Russia depends on the loans from the Western world. However, with the recent credit crunch, the western world including the US had to cut back on both their domestic and international loans. Also the collateral for the loans were provided through company stocks, and due to the existing social conditions within Russia, the stock rises also fell. This was due to the declining oil prices and due to the decrease in investors’ confidence. In order to deal with the situation, the government of Russia took to improving the position of the financial sector by investing in banks and the stock market. Russia provided more than 180 billion dollars to its banks and other financial institutes in order to boost up the position of the economy. Also in order to cope up with the declining oil prices, the government decreased taxes on oil exports so as to facilitate the oil exporters and allow them greater profit margin. State Regulation and Financial Crisis in UK Since the US and UK’s financial sector are closely aligned with each other, the crisis in US quickly impacted the UK economy. The root cause of the financial crisis in UK was essentially the same as US which include subprime mortgage loans, lax accounting standards and low interest rates. In order to cope up with the crisis, the Euro Nations along with UK and US coordinated together on a variety of measures. The measures taken by UK included recapitalization where the government provided support to banks in need of capital. The government either provided capital to the banks or turned the banks over the public banks. The shares of such banks were to be brought over by the government. Also the government offered to provide guarantee for debts of the bank. This was done in order to ensure the confidence of the investors in the financial system. The confidence of the investors was important so as to bring the financial system back on the right track6. The EU nations along with UK also stressed on the need for collaboration on the European level so that future financial crisis could be managed in a better manner. The IMF, for this matter was to be the international body that should be responsible for the collaborative effort on a global scale. State Regulation and Financial Crisis in EU Nations Since the EU Nations, collaborate on the national and international level, they also proposed a framework of action for the financial crisis. In the initial phase, the EU Nations proposed a plan for short term goals. These included three parts. In the first phase, the EU Nations worked on improving the financial situation by providing billions and trillions of dollars as a rescue plan for the member countries in EU. The rescue plan and other financial support were to be supported from Central Banks in the EU including the European Central Bank. The second phase of the plan focused on the impact of the crisis on the economy. This included addressing the issues of the rising unemployment rates and the decline in gross domestic product. This was done by facilitating a green technology along with promoting research and development. The third phase of the plan focused on the global impact of the financial crisis. The EU Nations realized the need for a strong international regulation body and coordination among nations so as to promote a unified regulation body. This phase also included developing a contingency plan in order to deal with future financial crisis of such kind7. State Regulation and Financial Crisis in China The impact of the global financial crisis on China was a little different from the rest of the world. This is mainly because regulations in China restrict individual investors to invest their money in foreign interests. Thus, the investments from China into US and other effected countries came from the government. The Government of China, in this matter, stated that it was able to pull back its investments on a timely manner and thus saved itself from being deeply affected. However, China too was impacted by the financial crisis as a result of globalization. In 2008, the Chinese stock index fell by a whopping 67.4% while exports were also seriously affected. It was at this time that China showed one of the worst periods of economic growth. The response of the Chinese government in this case was to maintain the flow of capital within the country. This was done by reducing interest rates in the country and by decreasing the amount of national reserves. Furthermore, the Chinese government introduced the $586 billion stimulus plan at the end of 2008. This was done to facilitate the economy through increased construction, exports, agriculture production and overall business transactions. The Chinese government mainly centered its efforts on its national economy without any focus of its efforts directly on the international economy8. Conclusion The current global financial crisis that began from US and impacted the rest of the world has taught various lessons to state bodies. The most important one of those is the need for regulation of the financial sector either nationally or internationally. While international regulation is a more sound decision but that would be difficult to implement considering the differences in accounting standards. Leaders of the G-20 nations must come forward to bring about an international body that controls the setting and implementation of such standards. The IMF or the World Bank would be suitable choices in this matter. As the financial crisis took the turn for the worst, government came up to save banks from going bankrupt. This greatly helped ease the worst part of the crisis but the capital crunch felt by US impacted the growth and development of countries throughout the world, specifically the emerging countries that could only depend on the industrialized nations to provide support. Regulation of the crisis by the government did not just help the financial sector but also helped in gaining back the confidence of the investors in the banking system to prevent stock markets from crashing completing. The recent financial crisis thus pointed out the dire need of state regulation of the financial sector. References Bisignano, J. and Hunter, W. C. 2000, Global Financial Crises: Lessons from Recent Events, New York: Springer Publications Black, J. 2010. Managing the Financial Crisis – The Constitutional Dimension, LSE Law, Society and Economy Working Papers Cornford A. 2010, Revising Basel 2: The impact of the financial crisis and implications for developing countries. G-24 Discussion Paper. 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