Financial Crisis in 2008 and Post Crisis Period - Literature review Example

Global Financial Crisis Global financial crisis can be defined as the situation when values of institutional financial instruments fall sharply. Such crisis was observed in the global economy in different times but the most dreadful one is what observed in the year 2007-2008. People are facing higher challenge of the recession, inflation, employment termination, lower purchasing power parity and increased rate of exchange rates for the foreign currency. In the study, global financial crisis of 2007-2008 is analyzed with its features and reasons of the crisis. Moreover, this study is going to outline the consequences of the Global financial crisis on the various industries like automobile, real-estate, retail, and hospitality. Table of Contents Table of Contents 3 Introduction 4 Financial Crisis in 2008 and Post Crisis Period 4 Reasons of financial crisis 6 Consequences of global financial crisis 9 Conclusion 10 10 References 11 Introduction According to Davies (2010), financial crisis can be defined as the situation when open market investors faced rapid decline in the values of financial institutions and assets. It is a period that empowers economic difficulty for financial markets and consumers. Mainly, certain terror will be created among the customers and they visit their banks in order to sell off the financial assets they hold. They are also withdrawing their invested money from the savings accounts. People are expecting that the value of the financial assets will be falling rapidly in the near future thus; they are losing their trust on the financial institutions. Global economy has faced different financial crisis periods. However, the crisis of the 2008 – 2009 is the most dreadful one experienced by the firms. Firms are rapidly harmed by the terms of profitability and sustainability. Global financial crisis of that period are distributed into five key stages that started from the year 2007 and continued till the year 2011. Financial crisis started with the sub-prime mortgages failure during the year 2007. Crisis continued as US debt status relegated in the latter period of 2008 (Alam, 2012). Financial Crisis in 2008 and Post Crisis Period Berlatsky (2010) opined that financial crisis was first observed with the downfall of Lehman Brothers organization. It was an extensive global bank that had huge impact on global financial system. During the year 2008, it got affected by financial crisis factors. They had to offer bailouts for the basic financial tools and investment in order to survive in the industry. Investors of the bank got the highest effects of the credit crunch during that period of time. They faced highest risk of money value slump in the year 2008- 2009 resulting most horrible recession in the last 50 to 60 years. Europe, America and Asia got affected by this recession or financial crisis. Monetary and fiscal system of the countries like USA, Canada, UK, Spain, Greece and many European countries got seriously affected (Dolezalek, 2012). During the financial recession period, financial investors faced risk of obtaining lower returns. Investors were earning feeble return compared to the pre-crisis time returns. Rich countries investors were withdrawing their investment due to the lower return from rate of the investment. They were using more liquid money than investing in various financial or banking sectors (Dermine, 2013). In addition, it is observed that the countries of Europe and USA continents were facing the challenge of exchange rate inflation. Foreign trade got affected for instable financial exchange rates. During the year 2009, financial crisis resulted with euro crisis. American Federal Reserve tried certain measures or the reducing effects of the financial crisis. They tried for economic growth with the help of buying back government bonds. Davies (2010) argued that financial crisis affected the international economy in five stage period starting from the year 2007 and continued till 2011. The situation occurred with issues like sub-prime facing reduction. During these five year stages, global economy got highly affected due to this depression and inflation effects. Dutt (2013) opined that in the time of August 2007, financial crisis began to show their affects on the financial system. Mainly, it is observed that banking systems are facing challenges as they are losing out trust among the investors. Major banking systems are facing the impulsive challenge of financial crisis. It was found that one of major international financial system ‘BNP Paribas’ declared to a close a financial activity. They had withdrawn three hedge funds that are specialized on the US based mortgage debt. The financial institute faced huge challenge regarding investment profitability of trillions of dollars that rose due to the corrupted derivative rinse. Dolezalek (2012) criticized that it harmed the organization more than what they have observed. BNP Paribas observed that they were getting higher exposure to financial crisis regarding the local banks or other financial institutions. Moreover, financial crisis have created barrier for different financial business organizations having partnership structure. Oozkan & Unsal (2012) cited that financial crisis gradually increased its power during the month of September 2008. During the time, it was observed that the USA based investment banking institution Lehman Brothers got bankrupted. The US government has granted their bankruptcy as they were unable to help institution with potential funds. Before the financial crisis, the US government helped the banks or financial institutions in terms of shielding those from bailouts. However, financial crisis forced several financial institutions to face serious difficulty. During that time, another US based banking institution Bear Stearns got insolvent and US government financial department was preparing for selling majority of the shares. On the other hand, UK based nationalized bank ‘Northern Rock’ got highly affected by the financial crisis during the year 2008. Thus, world based economy got imbalanced due to the crisis factors (Shiller, 2008). According to Savona, Kirton & Oldani (2011), financial crisis mainly harmed the developed economies rather than the developing countries. Countries like America, England, Spain, Greece, Canada and many other countries got the adverse affects of global financial crisis. In those countries credit crunch is observed among the financial institutions. In the time of global financial crisis, availability of the personal and corporate credit or debt is tough. In 2008-09 fiscal period, financial markets got challenged as investments are reducing in the stock exchanges and derivative markets. Both investment tools faced sharp turn down of values. USA and UK financial markets also faced certain challenges in terms of liquidity issues in investing in the equity funds and hedge funds. Financial crisis also devalued financial assets. Moreover, instable financial markets are creating higher fluctuation insurance and pension investment. Return on such sectors is reducing rapidly. In addition, currency exchange value of the US dollar, Euro, UK Pound, Swiss Francs and Sterling are reducing rapidly. Foreign exchange rates are getting hampered by exchange rate issues. Moreover, disrupted foreign exchanges are challenging balance of trade, balance of payment and GDP (gross domestic products) rate of countries (Shrivastava & Busch, 2013). Reasons of financial crisis There are many reasons of global financial crisis, but the main reason is debt control and investment payout. Stock market bubble In the UK and USA, stock market plays crucial role in creating the financial crisis. During the period 2007 and 2008, USA and UK stock market bubble played major role in creating and negotiating financial crisis. During the year 2007 and 2008, return of the Dow Jones, NASDAQ, S&P 500, London stock exchange and FTSE faced huge challenge. Stock markets reported with only 2.3% - 3.9 % return on the investment during the year 2007 to 2008 years. However, equity markets of China, India and developing countries reported with favorable performance or return on investment. Large MNC corporations and developed stock markets faced the intense challenge of the reduced annual earnings. Stock market got disturbed due to insufficient trust of investors on any organizations (Sternberg, 2013). Chinese or shadow banking system Shadow banking system is reported as one of the major global financial crisis causing issues. Mainly, it was observed that firms used debts from financial bodies that are not controlled by any national or regional financial regulators. Shadow banking was firstly observed in China and harmed the GDP earning of the country. During the year 2004-2005, such banking system was promoted in the US. Main reasons of popularity of such Chinese banking system is their high investment and low debt interest rate. Financial recession has affected the Chinese banking institutions in a very less manner. China government protected their banking sector from international competition. Thus, Chinese banks got a chance to grow to meet the challenge of the crisis stage. Their growth was such high that they are able to avoid the challenge of financial policy (Sun, Stewart & Pollard, 2011). Real estate bubble In the developed countries, real estate concepts are one of the most important financial concepts. During the period 2005 to 2007, real estate bubble conditions are highly identified in the financial systems of developed third world countries like USA, UK and many other European countries. Such systems are offering debts in comparatively low interest rates. Financial intermediaries are growing their demand and property prices are increasing in the developed economies. Demand and investment market conditions contrasted with each other so that institutional investors are able to get highest return in terms of their investment in the property equities (Alam, 2012). During the financial recession and inflation time, The Bank for International Settlements has stated the rate of the real-estate bubbles. They observed that real-estate prices are increasing rapidly from the year 2007 and they are expecting another financial crisis in the post 2017 period. Different central banks are using various tools to avert real estate bubbles like Basel III and countercyclical capital buffer (Davies, 2010). Corporate failures In the post recessional era, corporate houses are adopting credit rating policies in order to judge their liquidity and compatibility of debt paying. BBB-rated organizations are more in numbers. Such firms are having the threat of facing higher chances of bankruptcy. On the other hand, only three US based firms like Microsoft, Johnson & Johnson, and Exxon Mobil reported as AAA-rated. They are. The number of AAA-rated firms was 61 during the 1980’s. However, firms started using the debt financing as because interest rates reduced. It increased the sensitivity of facing financial crisis related challenge in the next five years. Geopolitical crisis Dermine (2013) opined that the geopolitical positions are also playing crucial role in the global financial crisis. Political situations are affecting financial markets in terms of creating absurd situations. It is also affecting the financial linkages or relationship between different countries. China based operational affecting the relationship among the clients of USA, UK and other developed countries. Instable political situations in Latin America, Africa, Middle East Area and South Asian countries are harming the profitability or return on investment for institutional investors. Butterfly effect of the political issues are affecting economy and causing certain level of crisis related tensions. Poverty crisis Income inequality proved to be the most dreadful challenge in the economy. It creates social conflicts and unequal distribution of money. Income inequality also creates certain risk in facing the economical crisis. Thus, countries having lower property level will be facing higher exposure of various factors of the financial crisis (Dolezalek, 2012). Cash crisis Liquidity of the market are also creating financial crisis. If the market has less amount of liquid cash, they will have the higher exposure of crisis related risk. Central banks of various countries are following quantitative reduction policies that are affecting the financial exposure. Excess liquidity will reduce the potentials of the debt market and interest rate bubble will be affecting the financial system (Shrivastava & Busch, 2013). Countries having higher liquidity will be having more controlled financial and non-financial institutes. It is observed that developed countries are having higher dependency on the banking or financial institutions. Lower liquidity is maintained in countries, as it is observed that the Citigroup reported with liquid cash of $487 billion and Apple reported with a cash balance $150 billion. Chinese banks and firms are having higher financial capacity so that they can manipulate economy of countries. They are developing artificial GDP in order to devalue the government debt (Savona, Kirton & Oldani, 2011). Consequences of global financial crisis Global financial crisis of the 2007- 2008 affected the developed countries and stakeholders rapidly. Mainly, it was observed that countries like USA, UK, Spain, Greece, Canada and many other European countries economy got disrupted by the crisis affects. Purchasing power parity of the people has reduced. Firms reduced their operational units, reducing job opportunity and increasing the rate of sacking employees. Higher labor turnover rate resulted lower funds among the people. GDP of the countries gradually declined as people’s buying behaviors are changing. Financial crisis affected various industries by means of the profitability and growth or sustainability in the firms. It was observed that industries like automobile, hospitality, retail and financial institutions are affected by financial crisis (Shrivastava & Busch, 2013). People are having lesser amount of funds in terms of purchasing luxury products. Leading costly car industry firms are facing the huge challenge of financial crisis as the sale of automobile products fallen sharply. Leading car manufacturers of Europe and USA are facing challenge of reduced profits and demands. Firms like Ford, GM, Chrysler, Jaguar Land Rover, BMW, Volkswagen and Peugeot are facing higher challenge than Asian brands (Sternberg, 2013). Profitability of the firms reduced so they reported with cost effective operational polices. On the other hand, Asian firms like Nissan, Toyota, Honda and TATA are having lower effects financial crisis. Such Asian brands are having loyal investors. Thus, they can continue the business in crisis period efficiently. Moreover, high end car manufacturers like Volvo, Bentley, Lamborghini and Ferrari are facing owners (Sun, Stewart & Pollard, 2011). On the other hand, industries like retail and grocery got least effects of financial crisis. Mainly, grocery and apparels are the daily needs of people. Thus, people purchase such products irrespective of the price and the earning generation. Firms are able to survive in crisis time with the help of the continuous profit generation (Savona, Kirton & Oldani, 2011). On the contrary, hospitality and travelling industries included leisure travelers in many a time. Travelers were referring economic class travelling rather than business and executive class travelling. Thus, economic crisis affected hospitality and travelling industry rapidly. Leading Organizations changed their structure and operational policy (Dolezalek, 2012). Conclusion From the study, an in-depth idea on global financial crisis is obtained. It was observed that crisis started in the early 2007 but people realized with the fall of Lehman Brothers an American multinational financial investment and lending organization. Financial system of world faced the effects of the Domino issues. Mainly, the countries like America, England, Canada, Spain, Greece and many other European countries have faced intense challenge of inflation, recession, job cuts, quality declining, currency exchange fluctuation and many other factors like the credit swaps and real estate bubbles. People are investing in the real estate more than normal financial investment. Financial crisis mainly reduces the profitability and sustainability of globalised firms. References Alam, A. (2012). Crisis Transmission: Global Financial Crisis. Journal of Risk Analysis and Crisis Response, 2(3), 157. Berlatsky, N. (2010). The global financial crisis. Detroit, MI: Greenhaven Press/Gale Cengage Learning. Davies, H. (2010). Global Financial Regulation after the Credit Crisis. Global Policy, 1(2), 185-190. Dermine, J. (2013). Bank Regulations after the Global Financial Crisis: Good Intentions and Unintended Evil. European Financial Management, 19(4), 658-674. Dolezalek, H. (2012). The global financial crisis. Edina, Minn.: ABDO Pub. Dutt, A. (2013). The Global Financial Crisis: Views from Asia. Development and Change, 44(1), 175-187. Ozkan, G., & Unsal, D. (2012). Global financial crisis, financial contagion and emerging markets. [Washington, D.C.]: International Monetary Fund. Savona, P., Kirton, J., & Oldani, C. (2011). Global financial crisis. Farnham, Surrey, England: Ashgate. Shiller, R. (2008). The subprime solution. Princeton, N.J.: Princeton University Press. Shrivastava, P., & Busch, T. (2013). Avoiding a Global Carbon Crisis: Learning from the Financial Crisis. Thunderbird International Business Review, 55(6), 647-658. Sternberg, E. (2013). Ethical Misconduct and the Global Financial Crisis. Economic Affairs, 33(1), 18-33. Sun, W., Stewart, J., & Pollard, D. (2011). Corporate governance and the global financial crisis. Cambridge: Cambridge University Press. Read More