Global Financial Crisis - Research Paper Example

Global Financial Crisis The 2007, financial crisis was declared by economists after through evaluations. A similar crisis was recorded in the year 1930. The crisis was characterized by great threats of collapse of major financial institutions like banks and stock markets among others. Furthermore, majority of people lost their jobs and many major businesses closed as a result of the financial crisis. Decline in global consumption rate was estimated at trillion of U.S dollars. The global financial crisis started with a high liquidity rate in major global companies and financial institutions among others. Liquidity rate is the process of transforming solid assets into actual money. It is an indication of insufficient flow of finances. This work focuses on the global financial crisis with regards to its causes, effects and remedies among other aspects. This crisis was caused by several factors more so in the developed world. One of the major causes was the collapse of the real estate sector in 2006. This occurred when the sector lost its securities (pricing). The majority of major financial institutions had to close some operations since majority of them depend on the real estate. This happened when the U.S among other developed nations like United Kingdom established some policies that enabled citizens to own homes by creating a general platform for easy access of housing loans and mortgages. This was a predicament that the move would provide adequate capital to the banks through safe interests. This caused housing prices to reduce from 2006 to 2012. Several real estate agencies or companies reported the greatest losses in the entire history of the sector. This could be indicated in the regional and international stock markets. The policy enables the majority to own their own homes, hence very few people were left to rent or purchase housing facilities from the real estate sector or agencies. The cause of the financial crisis was termed as ‘bursting housing bubble’. Top economists and the secretary of treasury declared the condition dangerous not only to the housing valuation but the national economy as a whole. Furthermore, it had economical implications for the real estate investors, home builders (contractors), suppliers of building materials, planners and architectures among other sectors related to housing. Most of these companies are funded by institutional investors as well as foreign banks. This compelled President George W. Bush to declare insufficient bailout to the majority of the homeowners who could not repay their mortgage debts or loans. In short, the crisis was a result of policies that enabled citizens acquires loans to build their private residential structures, only for the majority of them to fail to pay their mortgage debts. The government had to offer some bail out, even though at some point, the president declared that were limited resources to offer such bailouts. Depreciation of house prices increased to an extent that such values were far much below the mortgages. This created a kind of foreclosure in the financial sector. From 2006, there was a kind of financial drain from the consumers; as a result, this weakened financial stability among the banking institutions. There was a huge pool of loan defaulters, which compromised the housing market and the national economy as a whole. The loss was estimated to be trillions of U.S Dollars on a global scale. Much blame for the crisis is placed on the U.S government to establish some policies that encouraged direct deals between the citizens and the global or major financial institutions. History indicates that before 1970, United States ventured on a certain business or economy strategy where vital economic issues were enclosed to the government and not the public. During that period, there were limited deals between the governmental or global financial institutions and private developers, instead the government recognized corporations, companies or partners. Any party wishing to get some loans was to have some kind of loan securities like land title deeds among other assets. This discouraged parties from being loan defaulters since there were some consequences attached to that. Furthermore, policy makers had no say when it comes to the operation of major banking institutions. This was on the verdict that the national or global economy is determined by the financial strengths in the banking institutions. By 1970, major financial decisions were made by few qualifies economists. There limited policies or laws that interfered with the operations of such institutions (Savona, 218). Presidents of global banks were respected members of the society, one had to hold a doctorate in economics or financial management to hold such offices. The issue of global financial crisis is solely blamed on the current leadership. The idea of loaning the public to build their own homes was a good move, but some considerations were to be considered before its full implementation. The president ought to have left vital financial issues to be handled by the economists, who could have employed some economic models to ascertain the feasibility of the proposed housing plan. Loans were provided to several developers only to become loan defaulters. Furthermore, the move of the government to sponsor governmental housing agencies despite the losing trend was not economical. Some blame also goes to the financial institutions who offered housing loans (mortgages) to the United State’s home owners. They offered trillions of U.S Dollars without foreseeing chances of the loan defaulting. National financial reports indicate that the financial institutions offered large loan amounts with no backup to cater for likelihood of loan defaults. Financial institutions should have a defined loaning scheme which should consider basic loaning elements like appropriate interest rates, which should be in accordance with the central bank rates. The same scheme should consider the right time frame by which the loan should be repaid. It takes deep economical or financial principles to produce an effective loaning scheme. The scheme should also consider the current assets (both fixed and virtual assets), this would determine the ability of such financial institutions to offer bailouts incase of loan defaults. Financial researches indicate that this was not put into considerations when housing Act of 2008 was being implemented. The question every one asked was that did the financial institutions lack that knowledge were they conceding to pressures from the government policy makers. This issue touches on top political leaders and no one has dared made a single effort to answer the question. The irony is that United States is a developed nation with the best economists in the entire world, yet it became a victim of global financial crisis. Being a superpower, the president had to authorize some urgent moves to reverse the situation. The government sponsored some financial analysis to ascertain the actual cause of the global financial analysis. Some verdict associated major government sponsored establishes like Fannie Mae as the main cause of the crisis. This brought mixture of thoughts among several economists. Some economists argued in the favor of the governmental establishes and placed more blame on the rise in residential as well as commercial real estate pricing strategy. They blamed the instability in the housing pricing bubbles. However, some economists there were more issues concerned with the global financial crisis other than the loaning saga. They argue that other countries were also victims of the deflation but they made much low losses compared to that of the United States. They associate the crisis with the fact that major financial institutions offered loans with much low down payment or no deposits at all. The same economists still argue that the loans offered to the Americans could not have resulted in such crisis, the government must have a stake in the issue, but nobody would bother question much due to the political implications. However, this financial crisis was termed global because it affected the economy of every country in the entire globe. Both developed and developing nations suffered from the crisis. The U.S Dollars controls the global market. For instance, purchasing power of several items increased as each country tried to cope with the financial crisis. The prices of global item like fuel (petroleum products) increased by a remarkable percentage. It was this era that some nations declared hunger as a national disaster, more so in Africa. Some Non-governmental organizations also reduced their efforts to cater for some developmental programs in the developing nations due to economic strains. Some organizations had to retrench their workers to cope up with the financial difficulties. However, this brought some co9nflicts more so in the industrial courts. The constitution clearly states the rights of employees through employees Act. The attorneys of several organizations argued such cases in the context that the employment law has been observed in the United States since the government became financially stable since 1930. But come 2007, the organizations had no option but to get rid of some employees, due to the financial crisis in the entire globe. The argument was considered logical, you cannot hire someone you cannot pay, and that was the verdict. United States and other nations experienced the highest rate of retrenchment in history. The issue called for citizens to demonstrate along major streets. Their economical and employment rights were violated. The financial crisis had several negative implications in the health care sector, both in developed and developing nations. Majority of the United States’ citizens depend on public health care. The crisis saw insufficient funds allocation to the public health care. Some patients were left unattended due to lack of medical facilities. Public health insurance scheme interfered with, as a result of rampant retrenchment in the country. Special health programs like that of older adults were also compromised. There is no specific report indicating the actual deaths that came as a result of the financial crisis. This is because the issues touch on top political leaders in the country. 95% of developing nations depend on the United States for their health care. Currently, the U.S government caters for major health projects in the country and developing nations through the Center for disease Control (CDC). This organization is directly funded by the U.S Government. It therefore means that the health of several people around the world was put at a stake when the government could not allocate sufficient funds for health purposes. The government of the U.S directed huge amount amounts of cash from the national treasury to cover for the loss incurred in the housing market. The crisis meant insufficient funds in the financial institutions to support private and public business sector in the country and its surroundings. The majority of business establishes depend on financial institutions for loans. These loans are long and short termed based. Insufficient funds would imply a lame economy in the country. Some businesses were closed due to the financial crisis in both developed and developing nations. Several business plans were turned down due to lack of sufficient funds in the financial institutions. The government through its policy makers still justifies their move or decision for citizens to be provided with low interest loans to build their private or personal homes. This was meant to console the citizens who lose their residential property following the 2001 terrorist attacks. The government was concerned with the issue of insufficient residential facilities in the country. The government also thought that the financial institutions will make good returns from the interest of the paid loans. Economists also appreciate the move only that they add that the institutions should have insisted on a reasonable initial deposit to keep the financial institutions operating. The low rates attracted almost everybody who wished to own a home in the country. The majority became loan defaulters and the nation which depends on the financial institutions had to take some vital steps to revive the situation. The government took its own initiative to revive the situation since it posed major threats to the national economy. A year later (2008) the government of the United States allocated about nine hundred billion U.S Dollars to settle some of the debts by home owners. The amount was from the national treasury. The amount went to some governmental sponsored agencies like Federal Housing Administration (FHA) among others. The government also decided to provide financial support to some Government sponsored enterprises like Fannie Mae despite the major losses they had made. Some economists were against this move, since the sector was still on a losing trend and the government could spare some good amount from the national treasury in the name of rescuing the situation. By 2009, the housing companies sponsored by the government had made an approximated loss of about five hundred billion U.S Dollars. Some civil society members protested against this move since it was not in accordance with the Housing and Economic Recovery Act of 2008.Several governmental organs also contributed towards eradicating the effects of the global financial crisis. For instance, the FDIC parted with an estimate of about ten billion U.S Dollars to cater for some of the losses incurred due to the crisis. The 2011 government budget also included about 350 billion U.S Dollars as a bailout of the loan defaults that resulted in global financial crisis. The U.S had to seek some financial assistance from some of its trade partners, more the developed nations. The country from its treasury department made a special plea to the nations on a surplus trend to offer a little aid to reverse the nation. United States is the superpower, meaning it is the custodian of the global economy; this compelled the countries with a good surplus to offer a financial helping hand to the U.S. Much aid was from the oil exporting nations in Asia, among other parts of the world. The contribution was offered in various transaction modes. The situation created a good demand for financial asset with much high prices but relatively interest. Other nations offered financial support due to their high saving rates or due to high returns made from the sale of global commodities like oil and mineral ores among others. There are several factors to be considered to prevent occurrence of another global financial crisis in the future. The government should let qualified economists in recognizing institutions to make major decisions which have economic implications. The 2007 financial crisis was an order from the policy makers establishing a law that compelled financial institutions to provide interest friendly loans to Americans who wished to own private homes. The majority became loan defaulters and this compromised the economy of the country plus other nations as well. Economists have sufficient economical knowledge and principles to predict any economical outcome when a certain economic initiative is taken. There are some considerations to be made before any loan is offered. The loaning institution should have sufficient assets to run the normal operations of the institution in case of loan defaulters. Secondly, the scheme should insist on a reasonable initial deposit to enable the institution have good finances to loan other parties. Finally, the loaning institutions should have a defined and legal ways to dealing with loan defaulters. Another way of preventing such financial crisis is the idea of dealing with cooperatives and not an individual entity. Financial researchers lament that cooperatives have a small percentage of likelihood to be loan defaulters. This is because the majority of them will always have a reasonable to asset to act as a loan security. Cooperatives depend on financial institutions for their debt capital. It is important to certify cooperatives’ business plans before offering any loan. This is to ascertain the likelihood of loan repayment as stipulated in the loaning scheme. The aspects of risks must be incorporated in major business or financial decision makings. The housing policy did not consider the risks that were likely to be experienced during the implementation phase of the laws. They ought to have realized the likelihood of loan defaulters so that a defined criterion was used in offering the loans. On receiving the orders from the policy makers, the presidents of major financial institutions did not question much with regards to the risks that were likely to be experienced. Risks are foreseen implications that might have major negative impacts on any business decision. International relations or collaborations are other important strategies to limit chances of a financial crisis. The government of the United States received financial assistances from Middle Eastern and Asian nations that indulge in the trade of oil and mineral ores among other valuable commodities. Furthermore, some economists and financial planners suggest that the U.S ought to have acquired the finances to sponsor construction of citizens’ private residential facilities from nations with a good surplus rather than channeling finances from the national treasury personal loan scheme. To conclude, global financial crisis (2007) occurred when the government of the United States through its policy makers established housing Act that compelled major financial institutions to provide citizens with mortgages at attractive interest rates. This was a way of consoling the citizens from the 2001 terrorist attacks. However, the majority became loan defaulters and this compromised the financial strengths of the financial institutions. President George Bush declared a global financial crisis in the year 2008. The government has adopted some strategies to reverse the situation. For instance, several governmental organizations channeled about 300 billion U.S Dollars to the national treasury to cover some of the losses incurred due to the crisis among other strategies. Works Cited Savona, P. Global Financial Crisis: Global impacts and solutions. USA: Ashgate publishing, 2011.print Read More