Global Financial Crisis of 2008 - Essay Example

HOW DID THE GLOBAL FINANCIAL CRISIS (2008) ON EAST ASIA DIFFER FROM THE ASIAN FINANCIAL CRISIS OF 1997/98? by (Name) The Name of the Class (Course) Professor (Tutor) The Name of the School (University) The City and State where it is located The Date HOW DID THE GLOBAL FINANCIAL CRISIS (2008) ON EAST ASIA DIFFER FROM THE ASIAN FINANCIAL CRISIS OF 1997/98? Introduction The world is gradually evolving with salient changes that affect humanity in diverse ways. The population growth rate is higher than ever before as economies continue expanding seeking to sustain their populace. The technological advancements continue to dominate the prevalent growth and development as they ease the production process harnessing speed and efficiency. Since the yesteryears, economies around the world have been competing for scarce resources and segregated market shares (Edey 2009). This is because resources are scarce and located in diverse sections of the globe. Additionally, economies have to struggle shipping commodities to inefficient countries a concept that emanated right after the Second World War. Export oriented industrialization was the inception of the regional integration among countries. Economies would specialize in the production of a commodity and export the same to other countries (Tienhaara 2010). This concept thrives to date as economies outdo each other in terms of technological advancement and efficiency levels. Bilateral trade agreements in the modern day continue to increase as countries realize that reliance on autonomous policies only leads to stagnation. With these salient advancements, the international market is more cohesive than ever seeking to incorporate any willing country. The intent is to ensure that global growth and development is achievable while seeking to eradicate a myriad of economical challenges facing humanity. In the 1930, the global economy faced the first financial crisis that threatened the fabric underpinning the international relations. The great depression caused an overproduction in the American economy as investors lost their money. Unemployment rates skyrocketed as companies either downsized or faced foreclosures. The economy literally crumbled, and every stakeholder suffered as the consequences were lethal. As the economy regained stability over the years, countries engaged in stringent policy formulation seeking to ensure that the scenario does not reoccur. By that time, Asia was a controlled economy pegged on the fact that China and other supreme nations in the region subdued to communistic policies and regulations. This implies that the Asian populace had few investment opportunities in their region hence off shoring their capital to both America and Europe (Federal Reserve Bank of San Francisco, 2013). The great depression was a significant blow to the Asian investors as they lost their lifetime fortunes when the investment banks faced foreclosures. After years of deregulation in Asia, the region started opening up to new ideas and other forms of governance. With the passage of time, Asia had numerous investment ventures as investors were skeptical because of the financial crisis of 1930. The only problem was that the regulation enacted was not stringent enough to negate the reoccurrence of a financial crisis. In 1997/98, Asia faced a grueling financial crisis that threatened the milestones achieved over the years. This was because the regulation and statutory requirements in place would not mitigate the occurrence of a colossal financial calamity (Bridges 2009). It is worth noting that, at the time, Asia was still an emerging economy as for the many years in the past, and the economy adopted communistic policies. The impacts of the Asian financial crisis were extreme and far reaching as unemployment levels soared overboard and investors lost their fortune. Similar to the previous years, after the crisis, countries sought to enact stringent regulations that would combat such a scenario in the past. A decade into the future, another financial crisis, struck. The global financial crisis dating back to 2006 eventuated in 2008 with its impact traversing the globe. This was the worst ever financial crisis in the world as economies collapsed financial institutions seized operations investors were bankrupt, and economies had to solicit for loans seeking to finance their operations. Analysts and opinionated scholars affirmed that the crisis was as a result of deregulation by informed personnel working with the state. Since no incarceration or any other legal action prevailed, the perpetrators of the financial crisis walk free to date as millions of federal employees, investors and manufacturers languish in mass poverty. The impacts of the financial crisis were far outreaching, elaborate and inflicted millions of people around the globe (Herrmann, Pornupatham & Vichitsarawong 2008). It is prudent to connect the causes of the financial calamities with the impacts to attain a comprehensive overview of the events that transpired. Causes of the Asian Financial Crisis The Asian financial crisis was among the worst ever financial predicaments experienced in the region ever since the oil shocks in the mid 80s. The cause of the crisis continues to elicit arguable controversy across numerous quarters. With this debate ongoing, it is irrefutable that the crisis caused diabolical damage to the region’s economy threatening the attained milestones over the past decade. During the early 1990’s, Asia began liberalizing the economic front seeking to eradicate communistic policies. This was because with communistic policies growth was inhibited as there were minimal worthwhile ventures. At this time, countries sought to enact liberal policies that would permit free market economic in turning fostering economic development (Tuluca & Zwick 2001). This initiative spearheaded investors to withdraw their finances from the western counterparts and invest the money in their countries of origin. In essence, Asia experienced immense capital influx resonating to from the investor’s confidence in the region’s growth concept. Conversely, the countries in the region enacted inadequate policies to handle liberalization and immense capital exposing the investor’s funds into immeasurable risk. With inadequate regulation, financial institutions and banks engaged in extremely risky investments seeking to garner sizable returns. The cause of the Asian financial crisis was common to the entire region but affected each country uniquely. For instance, since Korea hosts numerous elaborate conglomerates that required adequate financing, the government had to bond resources and issue preferential loans. Thailand state organs exhibited a close relation with the financial institution. This aggravated the financial crisis in Thailand leading to a collapse of the country’s currency. In Indonesia, the degree of foreign participation in sustaining the countries financial sector declined considerably. The Asian financial crisis severely spread around the region causing unforgettable damage. Lack of adequate expertise to handle the capital influx was another cause of the crisis. It is notable that form many years in the past. The Asian region operated as a confined segment adorning salient principles allied to communism. In the 1990s countries in the region began adopting developmental initiatives seeking to match up to the western counterparts. The entailed opening up markets and implementing free market economics. These concepts required astute expertise and knowhow rare elements in the Asian region at the time (The Economic Crisis in East Asia, 2013). Additionally, the region encompassed fixed exchange rate system a policy that heightened exposure levels to the crisis. With money over supply in the region, inflation and a myriad of other challenges the financial crisis was inevitable. Causes of the Global Financial Crisis The global financial crisis remains the worst ever economic resection to hit the international fraternity. Starting from America, the global financial crisis traversed the entire world causing significant losses to corporations and governments alike. The onset of the global financial crisis dates back to the 1980s. This was the time when government elements colluded with financial experts seeking to deregulate the prevalent legislation. The deregulation endeavors continued till 2006 leading to the legalization of the issuance of synthetic collateralized debt obligations. In 2000, the public sector was on a spending spree as the country’s debt increases. The government was unable to pay civil servants amidst heightened cost of living. At the time, treasury provided cheap finance from Fed at a profit to the State. Banks such as JP Morgan Chase, Citigroup colluded with Barclays as it had a huge potential liability. The banks allowed a free for all unsecured mortgages. The financial sector of United States made a bold raid of taxpayers’ money. Banks made enormous profit at the expense of cities who were custodians of taxpayers’ money. The enacted law failed in apprehending the fraudsters such as Bernie Madoff. JP Morgan chase who incurred innumerable gains by gambling with hard-earned investors’ money. Wall Street had rogue wheeler-dealers who defrauded shareholders of their wealth. Malpractices in the stock exchange led to the collapse of corporations. The synthetic collateralized debt obligations were high risk high return security instruments issued by banks and other financial institutions. As the same time, the American government experiences a housing bubble like never before. Both home developers and home owners had access to cheap finances permitting them to build and purchase palatial homes. The loan issuer was aware that the borrowers were incapable of offsetting the balance in their life time. To safeguard their resources, lenders insured the high risk loans with unsuspecting Europe companies. This implies that, in any eventuality, the loan issuers were not exposed to any form of risk. The unsuspecting home owners readily applied for loans leaving banks and other financial institutions illiquid (Moshirian 2010). In 2007, homeowners began defaulting on the exorbitant mortgage debts that were already due. By mid 2007 repossessing, the houses were not a viable option as there was inadequate money supply in the region. Manufacturing companies in need of business loans would not access any form of finance as the financial institutions were facing heightened illiquidity. This resonated to foreclosures and downsizing initiatives intended to ensure that corporations remained afloat. On September 2008, Lehman Brothers filed for bankruptcy as America International Group (AIG) collapsed. This event caused panic to both investors and financial institutions in the world as the American populace had limited financial abilities implying that would not consume the available products. This not only fostered spiking inflation rates but also caused overproduction in America. Europe tried to alleviate the American situation by issuing additional funds to no avail. Europe plunged into a worse off financial problem that led to the 2011 Eurozone crisis. Asia tried to assist and rejuvenate the American economy. Since Asia had lost billions of dollars during the inception of the scuffle, its ability to reinstate the American economy remained inhibited. Impacts of the Asian Financial Crisis The Asian financial crisis had salient repurcations affecting the region’s integration, growth and sustainable competition in the global front. Some of the notable inflictions emanating from the global financial crisis include the following a. Currency Depreciation And Debt Crisis During the crisis’ first phase it spread from Thailand to Malaysia, Indonesia, the Philippines, then to South Korea. The Thailand government made an announcement on July 2 1997 indicating that it could no longer support Thai baht. The domestic currency was hence pegged upon the United States dollar. This translated into rapid outflow of capital flight resonating to a disaster in the country’s stock market. This economic devastation significantly affected neighboring countries. The export growth reduced considerably as the currency was devalued. Foreign traders sought to utilize the current account balance and foreign reserves as the country could not protect the currency downfall and utter devaluation. Countries in that situation failed to service due obligation given the prevalent high level of short-term borrowing in foreign currencies (Punyaratabandhu 2008). The government laissez faire policy of borrowing and extravagantly financing unproductive projects attributed highly to the Asian financial crisis. b. Financial Liberalization The East Asian financial crisis hit the region’s economies with little warning and resounding force. Growing competition in China and Mexico among other East Asia countries led to the adoption of financial liberalization. This aspect coupled with a pegged exchange rate system contributed to financial weakness leaving Asian economies exposed to financial market instability. These financial institutions lack of sound management and supervision policies exposing banks and other financial institutions to currency and maturity mismatches. Other factor that contributed to this is boom-bust cycles in financial stock and the real estate markets, in the region. With financial liberalization, Asian economies started aping the western and developed nations. Among the notable investment avenues included the stock market and real estate. Since there was capital influx in Asia and inadequate infrastructural policies in the region, the real estate investments were short term endeavors. c. Liquidity squeeze On August 1997, IMF signed emergency lending agreements with Thailand, Indonesia and Korea prompting the countries to introduce a number of financial reforms. These reforms included fiscal tightening, high interest rates and restrictive domestic credit. Individual countries failed to initiate these reforms intended to restore financial confidence and stabilize domestic economic activity. Korea argued that IMF’s approach of restoring confidence relied on tough restructuring of financial markets in turn instilling panic among creditors (Moe 2004). Conversely, tighter monetary policies that strengthen a country exchange rate may have contraction effect. This implies that it would drain liquidity from the domestic market and weaken business borrowers as well as increase pressure on the banking system. IMF loan packages compromised of commitments and sanctions which both lenders and recipients had to oblige. Lack of sufficient funds led to currency depreciation in the region’s economy. Financial markets in these countries were unstable due to capital market liberalizations that precipitated the financial crisis causing in-depth economic dislocations (Moha-Asri 2002). Capital markets reliance on short-term borrowing was inappropriate for long-term investments adding currency risks on high advantage financial institutions. d. Debt in Malaysia Malaysia permitted freedom of foreign funds in the stock market. This led to share as well as the value of fixed assets depreciation in the country. Currency depreciation caused a rise in import price tightening the prevalent inflation rates. Local banks, companies and the government had a burden of servicing loans from foreign countries. As companies face difficulties in loan repayment, servicing non-performing loans escalated weakening the financial position of banks. Banking policies in effecting the monetary and liquidity pressure suppressed borrowers’ position due to increase in the interest rates. Impact of the Global Financial Crisis The Global Financial Crisis is the most severe crisis since Great Depression in 1930. The Global Financial Crisis traversed the internal business fraternity in distinct and diverse ways. This crisis evolved into a full-blown financial and economic crisis. It was different from other financial crisis in breadth and magnitude since it affected almost all countries in the world. The epicenter of this crisis was the United States of America, which had the largest and central economy in the world as it was home to the dominant global currency and a well-developed financial system (Moshirian 2010). The global financial crisis originated from America and distributed financial and economic losses globally. It had a profound impact on the East Asia region as it hampered the region’s exportation endeavors. The remarkable growth of 9.8 per cent attained in 2007 declined to 3.3 per cent by 2008. As the global crisis deepened in the United States, East Asia international trade and investments declined. The freefall in global demand gave rise to price deflation and reduced wages that constrained the Asian consumption. It is worth noting that the Asian financial crisis forced investors to return to America and Europe in search for solace and secure investments (Fidrmuc & Korhonen 2009). The American government had vast cheap capital allowing investment banks to redefine policies and venture into high risk high return options. The global economic crisis threatened the growth and development attained in numerous countries around the world. For instance, the Asian economy was in turmoil because of the impending global crisis in 2008. The sharp rise in foreign currency entangled salient liquidity risks resonating to dire financial stress. The countries in this region had to bear the exorbitant cost allied to borrowing the United States dollar as collateral. Exports faced a sharp decline affecting income and investment of domestic economies. The plunge in export demand aggravated the disappearance of trade finance. For instance, during the crisis, Asia faced spiking oversupply as the global market could no longer sustain consumption rates. To avert further losses, foreclosures and unemployment rates, China among other economies had to inject trillion of dollars into the American economy. In February 2009, Korea’s exportation of memory chips, mobile handsets, cars and ships reduced considerably. This dragged industrial production and investment increasing unemployment rates in the region. The government of China estimates that 20 million migrant workers lost their jobs (Maroney, Naka & Wansi 2004). The country’s currency depreciated as United States pegged its currency to maintain parity. Poverty levels increased in the Philippines since the government was unable to deliver life necessities, and the populace could no longer afford quality health care or education. The collapse of big banks in America triggered global panic and investors had to withdraw their deposits leaving such banks in distress. In magnitude, the global financial crisis had far outreaching consequences. This is because Asia was an emerging economy trying to stabilize and gain ground in the global frontier. Both crises were untimely striking Asia at a moment of transformation. The Asian financial crisis confined it repurcations in the region adversely affecting some countries and sparing others. For instance, China did not suffer compared to Thailand because it was a stable controlled economy at the time. The global financial crisis did not spare stabilized economies as they had to pay the ultimate price for global integration and financial liberalization. To date, the perpetrators of the crimes remain at large, yet millions of people lost their fortunes. Governments tried to reform their financial infrastructures seeking to safeguard their resources. Only time will restore investors confidence affirming that their wealth will remain intact. Bibliography Bridges, B. (2009). Europe and the Asian Financial Crisis: Coping With Contagion. Asian Survey, 39(3), 456-467. Edey, M. (2009). The Global Financial Crisis and Its Effects. Economic Papers: A journal of applied economics and policy, 28(3), 186-195. Federal Reserve Bank of San Francisco. (n.d.). Economic Research. Retrieved October 24, 2013, from http://www.frbsf.org/economic-research/publications/economic-letter/1998/august/what-caused-east-asia-financial-crisis/ Fidrmuc, J., & Korhonen, I. (2009). The Impact of the Global Financial Crisis on Business Cycles in Asian Emerging Economies. Journal of Asian Economics, 1, 229-245. Herrmann, D. R., Pornupatham, S., & Vichitsarawong, T. 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