The Recent Global Financial Crisis - Essay Example

The Recent Global Financial Crisis Introduction: The recent global crisis that the world suffered from had started developing for a while before it had its impacts in the middle of the year 2007 and then in 2008 (Obstfeld & Rogoff, 2009, p.1). The crisis affected the entire world with fall in the stock markets, financial institutions being sold out or warped leading to the emergency need for rescue packages from the governments in order to bail out the severely impacted financial firms. The primary cause of the global recession could be addressed to the collapse that occurred in the sub-prime mortgage market in the United States (US) accompanied by turnaround of housing as reported by several other economies. The impact of the global economic crisis not only affected the financial institutions but the livelihood of almost everyone to some levels or the other (Shah, 2010). The current study focuses on a discussion and analysis of the recent global financial crisis and the consequent credit crunch in an international financial perspective, including the events leading up to the crisis, the economic and financial consequences, as well as the government responses and lessons to be learnt. Events Leading to the Incidence of the Global Financial Crisis: The global crisis was initiated in the mortgage lending market in the US, the problem arising with the Federal Home Loan Mortgage Corporation deciding not to pay for mortgages that involved high risks. Secondly, the bankruptcy filed by New Century Financial Corporation that remained a primary lender of mortgages for customers who were riskier in nature. With the occurrence of these incidents, the house prices started dripping down and foreclosures started increasing. With the increases in the risk factors and the fall in asset prices, the financial institutions feared the payments of interests and apprehension of severe losses prevailed. Although Federal Reserve had taken some initiatives in this context to assist the financial firms, however, the fall in prices of the assets could not be held back. Gradually the crisis affected the banking industry in the nation reflected by the bankrupt conditions of Lehman Brothers as well as purchase of Merrill Lynch by the Bank of America in the midst of government not prepared to bail out all banks. The financial markets gradually became highly unstable with severe fall in stock markets (Marshall, 2009, pp.7-8). Some of the primary events leading to the global crisis can be outlined as follows: August 9, 2007- The intimation of liquidity crisis followed by addition of capital by Fed and European Central Bank. March 2008- Bear Stearns was rescued by the Fed. September 8, 2008- Fannie and Freddie were nationalized by the treasury. September 15, 2008- Bankruptcy filed by Lehman Brothers (assets of $600 billion being the largest in the history of the US). September 16, 2008- Fed made bridge loans to the largest insurance company in the world, A.I.G. October 3, 2008- Bailout policy passed out by the government; Treasury was given the authority to spend $700 billion. With all these above mentioned events gradually occurring, the stock prices fell rapidly accompanied by fall in real housing prices by about 30 percent from 2006 to 2008 (Historical Context, n.d.). Economic and Financial Consequences of the Global Recession: The severity of the global recession has had its impacts on the prices of assets, the productions as well as the employment. These effects were not only restricted to the US but spread across the world with differences in the levels of their impacts. The most significant of these has been the impact on the debts and creditworthiness of companies and that the crisis led companies to encounter difficulty in performing exports and earn gains following their settled plans (Reinhart, 2009). Three particular consequences could be realized from the global recession. These included: (i) the rising debt, the household debt in particular; (ii) the possibility of a comeback to an insecurity with respect to international monetary factors and of the negative response of the rest of the world to support US (and UK) deficits in trade; and (iii) ecological crisis affecting the global economy ending the low prices on commodity that used to be followed earlier (Kilmister, 2008). In other words, these factors developed affecting each and every individual or groups in some degrees. In an international perspective, the economic and financial effects of the global recession can be understood from the impacts that different countries like the US, UK, Africa, Europe, and India suffered. Also, different sectors including the health sectors, the telecom industries have been severely affected. Considering the situation in the US, not only the financial institutions suffered bankruptcy, but huge crisis in employment followed leading to anxiety among individuals accompanied by changes in work environment and lack of optimism on the economic state of the country (Crabtree, 2011). The effects on the European economy reflected through the drastically dropping levels of Gross Domestic Product (GDP) of the country; the records being 4 percent fall in GDP in 2009 and another 0.1 percent by 2010. The level of output in the country also suffered immensely with the ongoing recession effects (Impact of the current economic and financial crisis on potential output, 2009, pp.4-9). Africa too suffered the crisis and their economic growth declined as a result of the recession. Stock markets in the country had become highly volatile affecting the financial sector significantly. Moreover the foreign exchange market also got pressurized along with negative effects on the trade of the country (The global financial crisis: impact, responses and way forward, 2009). India too faced downside risks generated from the crisis that primarily resulting from reversal of capital flow based on projections of slow economic growth rate. Instability in the portfolios also affected the equity market. The Indian banks have however been less affected directly but the industrial sector suffered lower growth that resulted in lower employment rates as well (Global Economic Crisis and its Impact on India, 2009, pp.28-31). The economic and financial effects of the crisis have also been felt in other sectors like the telecom industries of the health sectors. With increasing prices in food and fuels, inequities also increased leading to difficulties in health care provisions (Chan, 2008). The telecommunications industry also suffered in the way the economy had become slow and thus had to incorporate measures that could balance their growth plans with the recession effects (The impact of the current financial crisis on the telecom industry, n.d.). Thus the above sections of the study reflect how the global recession had its impacts across the world severely or moderately. Government Responses and Lessons Learnt: Realizing the rigorousness and the significant negative impacts of the recent global recession, the governments had tried their concerned measures towards trying not to allow the crisis to become a complete disaster for the world as a whole. In this context the primary steps that the governments have been obtained to have considered as measures of responses to the crisis included: (i) bailouts and injection of capital into financial systems such that the credits could keep on flowing, (ii) lowering the rates of interest to encourage borrowing and investment, and (iii) additional fiscal expenditure to increase aggregate demand (Verick & Islam, 2010, p.35). These measures of the government were focused towards lessoning the impacts of the global recession on the business world as well as in the lives of common people. Some of the lessons that can be said to have been learnt from the global crisis might include: (a) Sound fiscal policy was needed to sustain during tough times; (b) Recession deferred the expected workplace deficiency; (c) Newer standards were necessary for the financial systems; (d) Public sector financial institutions proved their values; (e) Recovery necessitated global collaboration; (f) Integrated trade might cause both ups and downs; (g) Local governments were incapable of providing solutions; and (h) Psychology too played a significant role in the manner the recession was handled (Crisis and Intervention, 2012). However, one of the most significant factors that was learnt was the need for confidence at a time when such crisis was having its significant effects across the world (What lessons can be learned from the economic and financial crisis?, 2009). An Analytical Overview: From the above study, it can be analyzed that the severe impacts from the global recession to a great extent occurred as a result of decisions that were not considered sincerely. For example, the sub-prime mortgage market collapse and the fall in the prices of houses resulted from financial institutions trying to provide loans or stop pat for mortgages without interpreting the consequences of the action. Moreover, the effects of the recession could increase since there was lack of confidence and lesser preparation on the part of the governments as well as the individual organizations. It can thus be said that had the governments and the business organizations kept in focus the consequences of their actions sincerely, the severe global recession might have been avoided. Conclusion: The study has been focused on the events and effects of the recent global recession that had its roots in the US and thereafter spread its impacts across the world. It can be learnt from the study that while some countries have been moderately affected, many have suffered severely in terms of economy and finance, with the US being most significantly. However, from the effects and the lessons learnt from the recession, it can be concluded that if the governments and the individual organizations of every country focus on the consequences of their actions and be prepared confidently to encounter troubled times as well, then the severe effects of such economic and financial crises might be ignore. References Chan, M. (2008). Impact of the global financial and economic crisis on health, WHO, [online] Available at: http://www.who.int/mediacentre/news/statements/2008/s12/en/index.html [Accessed on March 31, 2012] Crabtree, S. (2011). 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