The U.S. Financial Crisis- Impact on Trade - Research Paper Example

The U.S. Financial Crisis- Impact on Trade Introduction: Problems related to incentives and information has been primarily associated with the economic crisis of 2007/2008. Certain incentive systems led the delivery of deceptive information rising conflicts of interests. There were excessive risks involved as well as fraudulent behavior that initiated the crisis. Moreover as the crisis suggested, there was lack of understanding the economics of securitization. Also, the risks were not significantly understood or considered, and the probable events could not be predicted (Stiglitz, n.d., p.1). As a result of the crisis starting in 2007 and building up by 2008, the Wall Street could be said to have been remade (Jones, 2009, p.2). The present study focuses on the events and the causes leading to the crisis and how the situation before crisis differed from that what resulted after the crisis. Lack of predicting the nature of the economy and the prospective results of the economic policies leading to decline in the economic profits eventually led to the financial crisis of 2007/2008. The Financial Crisis of 2007/2008: The international trade and the economic growth in the world had presented significant positive results before the economic crisis of 2007/2008. From the time period from 2000 till 2007 the gross domestic product of the world had reflected an increase of 3.2 percent in a year that surpassed the annual growth of the 1990s that figured around 2.5 percent. Countries like China, India and Russia that were emerging as economic countries in the market also reflected expansions in their growth to as high as 6.5 percent in a year resultant of the different economic reforms. The farmers in the U.S. also benefitted from these growths leading to rising farm income of around 43 percent. The financial crisis affected the world starting in 2007 and deepening in 2008 leading to recession in several countries (Appendix A) (Liefart & Shane, 2009). The crisis had initiated in the US when the housing bubble burst out and there were increasing defaults in mortgages, particularly in the subprime mortgages, that had grown for the borrowers who were not worthy of such loans, thereby leading to instability in the financial institutions and subprime losses (Appendix B) (Helleiner, 2011, p.69). The different causes that were obtained to have led to the crisis include: imprudent mortgage lending relaxing the standards of lending, housing bubble reflecting rising prices of houses, global imbalances, securitization, lack of transparency and responsibility in mortgage finance, rating agencies giving AAA ratings to several downgraded securities, mark to market accounting, deregulatory legislation, shadow banking system with financial activities moving out of government safety, non bank runs, off balance sheet financing, subprime lending mandated by government, failure of risk management systems, financial innovation, complexities, human infirmity, bad models of computer, excess leveraging, relaxed regulation of leverages, credit default swaps, over the counter derivatives, fragmented regulation, no systemic regulation of risks, short term incentives, and tail risk (Jickiling, 2010, pp.5-10). These issues initiated in the US and gradually affected the world and the international trade. With the crisis deepening in 2008, various measures that imposed restrictions on trade activities were initiated by different countries. General hikes in tariffs, particularly in iron and steels, primary products, agricultural foods, were incorporated in countries like Russia, India, Turkey, Vietnam, Ukraine, EU, Brazil and Ecuador. Standards and certifications in trade also changed in several countries like Malaysia, India, Indonesia, Ecuador, Thailand and South Korea with bans and restrictions on several business issues. Licensing system of imports also altered from ‘free’ to ‘restricted’ in many countries as a result of the recession. Also, several goods and products were made to be under the control of government and its procurement. This included countries like the US, Indonesia, and Australia. Also, with the crisis, several countries bailed out many of their industries that were in a stage of struggle (Appendix C) (International Trade After the Economic Crisis, 2010, pp.1-11). In this regard, several measures had been considered by the federal government although the effectiveness of these measures in the long run was in doubt. The policies that the government initially adopted trying to expand hoping for banks to lend more to businesses and other customers, proved to be traditional and banks did not cooperate to such policies. Failure in these policies led the government to involve other policies that were unprecedented in nature. This led to the availability of mortgage securities and other riskier loans. Also with investment banks being on the verge of bankruptcy, the government took the responsibility to lend to investment banks itself. Although these measures proved to be successful to some extent but they could not provide complete success to the crisis. However through these measures, a complete collapse of the financial system could be avoided. The Congress too took some effective measures like passing of an economic incentive of $168 billion, the effect of which was temporary (Moseley, 2009). The differences in the conditions of the international trade before and after the crisis may be understood from the chart presented in Appendix D. While the growth in international trade had been significant before the economic crisis; it was badly affected as a result of the crisis. According to estimations made by the World Trade Organization (WTO) the world trade volume had fallen by an approximately 12 percent in 2009, that reflected on the earlier figures during the 2006. Severe reductions in trade were experienced by all G20 countries. During the first instances or deepening of the recession, restrictions in imports were increased with slight effect that was incorporated by the G20 countries. Later predictions could be suggested by the WTO that hinted on a probable rise on such restrictions in trade. It was during the period of time from October 2008 and March 2010 several disputes were recorded with the WTO in relation to trade and there was not much that the countries could do in order to handle the recession (Hart & Dymond, 2010, p.82). In this regard it can be said that the crisis could be predicted but the measures undertaken by the government were not sufficient enough to avoid the entire crisis from affecting the world. However, with the passage of time, as things may turn out to be positive again, the crisis might be considered as a lesson for the economic policymakers to consider trade policies and measures accordingly. With the economic crisis of 2007/2008 affecting the entire world and leading to recessions across several countries, the economic strength of the US may be questioned, since US remains the starting point of the recession. The key skills of the workers, the different policies followed in the businesses and manufacturing in the country needs to be sustained as well such that the phases of downturn may be successfully managed. Not only the skills of workers, but the infrastructure also needs to be maintained with quality and productivity. Maintenance of tax code that can support the measures involving risks and innovation also proves essential at this juncture. With the collapse of the financial stability, the world would require greater regulation of the economic system as well. The growth in productivity needs to be balanced in a manner such that every individual may be benefitted (Baily & Slaughter, 2008, pp.1-11). The above mentioned steps are necessary for regaining the strength of the world economy as well in individual countries such that the international trade can effectively regain its position. As far as US is concerned, being the leading economy in the world, the country needs to be more sincere with its economic and financial policies such that downturns may be predicted and the country can be prepared to manage such phases. Considering the world as a whole, each and every country needs to strengthen their policies and measures in a manner such that crisis in one country does not become capable of affecting other countries severely. Regulation of the economic policies is highly significant in this regard. Conclusion: From the above study, it can be concluded that the recent economic crisis of 2007/2008 resulted from a combination of causes that mostly reflect on the lack of sincerity on the part of the economic policymakers who neither predicted the probable events well ahead of their occurrences, nor could they consider measures that might effectively avoid the effects of the crisis. With the unavoidable circumstances, the recession had spread across the world thereby affecting the international trade significantly. Different countries took initiatives to alter their trade policies that eventually affected their normal trade practices and profits to great extents. Hence the recent crisis proves to be a lesson for the entire world such that more effective and significant measures may be considered across the world economy to avoid such disastrous effects of economic recession. References 1) Baily, M.N. & M.J. Slaughter (2008). Strengthening U.S. Competitiveness in the Global Economy, pegcc, Retrieved on September 25, 2012 from: http://www.pegcc.org/wordpress/wp-content/uploads/pec_wp_strengthening_120908a.pdf 2) Globalization not protectionism remains the main trend in the world economy (2012), typebad, Retrieved on September 24, 2012 from: http://ablog.typepad.com/key_trends_in_the_world_e/2012/04/globalization-not-protectionism-remains-the-main-trend-in-the-world-economy.html 3) Hart, M. & B. Dymond (2010). The Great Recession and International Trade, IRPP, Retrieved on September 25, 2012 from: http://www.irpp.org/po/archive/jun10/hart.pdf 4) Trade growth to slow in 2012 after strong deceleration in 2011 (2012), WTO, Retrieved on September 25, 2012 from: http://www.wto.org/english/news_e/pres12_e/pr658_e.htm 5) Helleiner, E. (2011). Understanding the 2007–2008 Global Financial Crisis: Lessons for Scholars of International Political Economy, The Annual Review of Political Science, 14, pp.67-87, Retrieved on September 23, 2012 from: http://www.rochelleterman.com/ir/sites/default/files/Helleiner%202011.pdf 6) International Trade After the Economic Crisis (2010), unctad, Retrieved on September 24, 2012 from: http://unctad.org/en/docs/ditctab20102_en.pdf 7) Jickling, M. (2010). Causes of the Financial Crisis, Congressional Research Service, FAS, Retrieved on September 24, 2012 from: http://www.fas.org/sgp/crs/misc/R40173.pdf 8) Jones, C.I. (2009). The Global Financial Crisis: Overview, econ, Retrieved on September 22, 2012 from: http://www2.econ.iastate.edu/classes/econ502/tesfatsion/globalfinancialcrisisoverview.2009.cjones.pdf 9) Liefart, W.M. & M.Shane (2009). The World Economic Crisis and U.S. Agriculture: From Boom to Gloom?, The Magazine of Food, Farm, and Resource Issues, Choices, 24(1), Retrieved on September 23, 2012 from: http://www.choicesmagazine.org/magazine/article.php?article=59 10) Moseley, F. (2009). The U.S. economic crisis: Causes and Solutions, isreview, Retrieved on September 24, 2012 from: http://www.isreview.org/issues/64/feat-moseley.shtml 11) Stiglitz, J.E. (n.d.). The Financial Crisis of 2007/2008 and its Macroeconomic Consequences, unpan1, Retrieved on September 22, 2012 from: http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan033508.pdf 12) Private Wall Street Companies Caused The Financial Crisis — Not Fannie Mae, Freddie Mac Or The Community Reinvestment Act (2011), politicalcorrection, Retrieved on September 24, 2012 from: http://politicalcorrection.org/factcheck/201110140001 Appendices Appendix A: GDP Growth in US, World and Emerging Countries Before and During the Economic Crisis of 2007/2008 (Liefart & Shane, 2009). Appendix B: Subprime losses of 15 Largest Subprime Serving Companies in 2008 (Private Wall Street Companies Caused The Financial Crisis — Not Fannie Mae, Freddie Mac Or The Community Reinvestment Act, 2011). Appendix C: World Trade Percentage Change since Maximum (Globalization not protectionism remains the main trend in the world economy, 2012). Appendix D: Growth in Volume of World Merchandise Trade and GDP 2005-13 in Annual Percentage Increase (Trade growth to slow in 2012 after strong deceleration in 2011, 2012). Read More