The Global Financial Crisis 2007-2009 - Essay Example

? The global financial crisis The global financial crisis The global financial crisis of 2007-2009 attested to beremarkable and unique. It was unique, in global context: in previous occasions, not all part of the globe has been in recession. This is to mean that while other economies were experiencing recession, other substantial regions of the globe remained unaffected. This has been happening of course since 1950s to 90s and the excluded economy has always been Japan. The recession was peculiar for major economies as well; economies of nations such as United Kingdom and the rest of West Europe felt the heat in a unique way. Not relying on the fact that crisis was caused by retarding market demand and financial mishap rather than ostensible anti-inflammatory guidelines, as has been the crisis case since 1945. Japan is the only nation among stable economies accustomed to this type of recession and this is as a result of the past-bubble downfall of the 1990s. For emerging economies, the case was quite different, as much it may have been associated with a rich economy: emerging economies had a deeper conventional trend that begun by a flow in inflation in 2008, which made many Asian countries to adopt tough anti-inflammatory regulations. Then the effects of such policies were witnessed at world trade level after Lehman and associates went bust in 2008; this saw poorer countries in Latin America and Africa feel the hitch of shortage of raw materials from China and India. Several players are behind the crisis that took the world by storm. One of the major bodies that are keenly looked at is the International Centre for Financial Regulation (ICFR). Based in London, ICFR was formed by U.K government in collaboration with international financial institutions with an aim of monitoring financial activities and coming up with international policies that would guide matters related to finance across the globe1. ICFR has been mandated to form laws that will enhance proper trade and should guide the global economy. Critics have been concerned about how such bodies carry out their activities; this is as a result of constant financial rescissions that have rocked the globe in the recent past. Some argue that such bodies should be abolished so that each country forms its own rules to govern trade. Other critics argue that the institution should consider reviewing its policies so as to avoid such crisis. ICFR members are claiming not to be blamed future expectations are unpredictable and cannot be fixed while coming up with such regulations. Even though the ICFR may defend its reputation, outcry has persisted and several fingers pointed towards the organization. Some of crisis effects such as guarantees and bail-outs have proved the organization to be unstable. Much of consequent regulatory agenda debatably reflects the need to tackle such weaknesses rather than implementing well investigated optimum governing solution. As a result, high leverage that was manageable only under circumstances of growing investor confidence and asset price is considered to be a weakness form the body. Weak governance, remuneration and accountability culture within financial bodies has been a factor as well behind downfall of the organization. Some analysts accuse the organization of hysterical and unorganized creation of liquidity to imbalance and motivate countries to invest in financial assets present in deficit countries. Other organizational weaknesses are pointed out they need attention to avoid plunging the world economy in such financial jeopardy; these include but not limited to: emergence of increased and uncontrolled ‘shadow banking’ segment and adoption of complicated financial tools and techniques that made risk disperse all over the global financial division and relevant interdependencies created, as well as missing public information on the extent and distribution of risk occurring in the financial system. Some commentators characterize the emergence of these, at least not wholly, to administrative failure in the accountability and governance of financial rules. For instance, there are some situations when the regulators were all aware of the emerging problems and failed to take action. Such instances include: formal motivation of operations and roles of credit rating agencies; jeopardies posed as a result of credit default swap growth; need for transparency in OTC derivatives marketplaces and insufficient monitoring of investment banks. Other scholars argue that the 2007-09 financial crises should precisely be dubbed “banking crisis” rather than “financial crisis”. Reason being that the recession exacerbated financial blow that directly struck the banking sector. The duration was informed with failure of huge financial institutions such as Lehman Brothers, Bear Stearns, Northern Rock and others across U.K and Europe. The failure exposed some institutions to takeovers and calling for government inclusion in order to save the situation2. Invention and deregulation that occurred in the financial division was a major cause for the 2007-09 crises. Economists argues that the modern financial model, which is a factor behind development of recent financial techniques as a result of deregulating financial sector that started way back in 1980’s, was also a factor behind the recession. Authorities globally neglected the rules that limited competition and relied on the ones with lesser restrictions and obtained a huge feasibility of innovation. There is no doubt that the 2009-07 financial crisis was as a result of excessive risk taking that took place in the financial markets. Financial institutions took much risk and in the end investors were compelled to buy compound financial products and services, whose delicacy was not well known. Supervisory and regulatory institutions that existed happen not to bear the pace at which financial engineering grew that resulted into more complex products. At the same time, credit determining agencies have not detected financial extremes that initially emerged in the US mortgage market in the year 2007 which later mutated to global markets3. It was very puzzling that a lot of executively rated mortgage securities plummeted in value hastening the recession. Thus, the recession triggered for intervention from all corners for more financial control. Excessive financial control has its own demerit, categorized by misusing entrepreneurial inventions and minimizing efficient risk allotment. ICFR is always responsible for drafting laws that govern systemic risks. Failure of the institution to have proper structure to monitor such risk is clearly blamed on the institution. Systemic risk is becomes tricky more especially when financial institutions turn to be untrustworthy. It 2007 recession, some large financial institutions failed to honor their pledges making other financial institution be responsible. The culture of lenders seeking secure investments at the time of crisis defines why trading in risky assets drastically decreased and their market yields increased relatively government federal debt during the 2007-09 recession. At times all firms in a given industry are affected with the same hitch and an individual firm failure may scare away investors in the whole industry. An increase in systemic risk needs a systemic reaction. It is said that operative global policy and governance development is never urgent and compulsory. The recession showed that present global financial institutions are insufficient in their policy reaction to systemic risk and is unable to maintain pace with daily innovation and increased system intricacy in global finance. Vigorous structural alliterations are needed, including in line with regulatory reforms4. Even though critics have accused ICFR, there some other factors that contributed to the cries that should not go untouched. Subprime lending was also a fact behind 2007-09 recessions. Subprime borrowing is lending money to borrowers who have poor credit background. Usually, subprime borrowers are not to be given loan. Therefore, subprime loans would result to short term maturity accompanied with installment that has severe penalty. The escalating subprime borrowing was informed by several factors such as; tight security, deregulation of financial institutions and loose monitoring of reserve capital divide in the banking division. A worldwide saving surfeit that took place in the period before the globe experienced recession arguably is said to be a reason behind the 2007-09 recession. Savings that were made with huge economies such as China by having excesses in their current account and amassing foreign reserve provided the availability of liquidity as well as enabling western countries such as United Kingdom to manage low interest rates in the duration preceding financial recession. In the end, this worldwide saving glut is responsible for increased house rents and availability of credits. However, global excess saving is challenged and still contentious as to whether it actually caused the recession in 2007-09. Even though banks compete among themselves, they as well cooperate in terms interbank lending and doing trade of offshoots such as foreign currency and interest rate swaps. The cooperation comprises a network of financial institutions across the globe; hence failure of one financial institution impacts the whole association of banks. Failure of regulatory bodies to adapt to the new innovation that occurred in the banking industry and financial sector as a whole is also perceived to be a factor behind the recession5. The U.K government was really dedicated to end the crisis. The government used monetary and fiscal policy to try solving the recession. The Labour Government experienced ideological shift in implementing the fiscal policy with an aim of resolving the recession. The government increased its borrowing in an effort to increase payment transfers and maximize spending on goods and services. Also seen as stimulus package, taxes were reduced to boost spending. Some argued that the effort of the government was like a shift in the Keynesian economic policy. Regrettably, these measures flopped since household disposal income did not increase as anticipated by the government. The only option that was left for the government was ‘monetary policy’ as a way of doing away with the recession. Just the way hangover is unavoidable, the only cure is to avoid taking alcohol. This is to mean that to avoid future recession, antecedent boom should be limited. The key principle must be to support the restoration of a favorable environment for business people and organization to operate in6. On the monetary side, central banks should be done away with. These institutions are like arsonist upset as firefighters and claim that they can only put out fire that they started. Some critics argue that making the banks currency redeemable in gold or some other valuable commodity might help the situation. However this might be not all that much effective, since some may shun such measures especially in the event of immediate cries. The best option is to do away with the central banks an allow banks to competitively produce currency and deposits and strive in making them redeemable in the public’s most preferred community. The ICFR should put down clearly stated rules and regulation to help monitor activities of financial institutions. The rules should be flexible in that it caters for future changes. ICFR should include all bodies especially when coming up with such policy to avoid blame games. The organization should develop an algorithm that caters for all players in the financial sectors. The hedge fund industry has turned to be a major player in the financial diaspora, including derivatives, securities and currencies7. However, the institution has been given little attention in terms of regulation. Hedge funds should be itemized and regular updates given about their status more especially on their asset concentration. Such information is necessary in monitoring complicated transactions. Judicious regulation of financial institution could also help curb any extras in hedge money taking since banks normally give hedge funds through simple contrivances such as prime brokerage. In conclusion, both local and international financial sectors need to be regulated by a uniform authority that is capable to coup with the unpredicted innovation that occurs within the industry. Steps such as quantitative simplicity and other conservative ways of undertaking banking crunch whether fiscal or financial will not bear fruits if not convoyed by institutional reform of the financial sector. This paperwork applauds steps taken by international bodies in regulating banking sectors. Works Cited Top of Form Cline, William R. Financial Globalization, Economic Growth, and the Crisis of 2007-09. Washington, D.C: Peterson Institute for International Economics, 2010. Print Bottom of Form Dejua?n, O?scar. The First Great Recession of the 21st Century: Competing Explanations. Cheltenham: Edward Elgar, 2011. Print. European Union Accession: Opportunities and Risks in Central European Finances. Washington, D.C: International Bank for Reconstruction and Development [u.a., 2000. Print. Gregg, Samuel. Becoming Europe: Economic Decline, Culture, and How America Can Avoid a European Future. New York: Encounter Books, 2012. Print Morriss, Andrew P. Offshore Financial Centers and Regulatory Competition. Washington, D.C: AEI Press, 2010. Schlo?sser, Anna. Pricing and Risk Management of Synthetic Cdos. Heidelberg [etc.: Springer, 2011. Print. Wilson, Richard C. The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives. Hoboken, N.J: John Wiley & Sons, 2010. Read More