Global Financial Crisis: Causes, Consequences, and Responses in US and Saudi Arabia - Research Paper Example

?Global Financial Crisis: Causes, Consequences, and Responses in US and Saudi Arabia Introduction The countries’ economy worldwide has encountered financial crisis frequently (Norgren 10). Thus, this phenomenon is not new in the world. Nevertheless, the global financial crisis (GFC) happened in 2006 to 2008 is considered as the most severe recession in history since World War II. GFC started when the U.S investors lose confidence in the value of sub-prime mortgages (Yeoh 42). All the countries globally are affected including Saudi Arabia. Saudi Arabia’s GDP declined by 5.5 percent during 2008 (CIA). Conversely, U.S.’s GDP also declines by 6.3 percent during the fourth quarter of same year (BEA 1). While these two countries are both affected by the economic recession, the consequences and ways of coping the problems are different. This paper aims to discuss the causes and consequences of financial crisis in the U.S. and Saudi Arabia, as well as the actions taken to recover the economy. Causes and Consequences of Financial Crisis in the US The economic system of the United States is capitalism. This allows private ownership to stimulate production of products and services with low interference from the government. Since this system has been utilised by US, all the people are affected during the global financial crisis (GFC) considering that most businesses are privately-owned. GFC started in 2006 when there was a rise of subprime mortgage delinquencies. Housing rates in the U. S. are generally high and people cannot anymore afford to pay with the rates. Householders were forced to leave their homes since their property was foreclosed. Likewise, the investment of business and clients spending of goods also decline which resulted to decrease of country’s GDP (Marshall 26). Further, knowing that U.S.’s housing rates were high, foreign investors took opportunity to invest in the country's market through the issuance of mortgage security like CMO. Yet, when the mortgage securities began to decrease, institutions were not anymore willing to let their cash to be borrowed due to lack of trust. Further, the investors made efforts to liquidate assets to stay out from investing. However, there were no buyers of assets in the market. As the credit became deficient and because of loss of trust of the financial institutions in the US, foreign banks started to increase the rate of interest “which they lent money from each other” (Bolton 5). In 2008, the Lehman Brothers bank, which is one of the biggest investments in the world, was bankrupt. As a result, the U. S market collapsed, and there was a high rate of unemployment. Consequently, the country’s main imports and trading to other countries like Saudi Arabia also declined which makes the problem spread globally. Causes and Consequences of Financial Crisis in Saudi Arabia Saudi Arabia has a capitalist economic system like United States. The country’s economy mainly centers on oil. In fact, Saudi Arabia is the biggest producer and exporter of petroleum globally. In relation with the GFC which began with the subprime mortgages in the United States, Saudi Arabia like other countries was impacted by the said financial crisis. Following the collapse of U.S.’s economy, the imports and trading of United States to other countries especially in Saudi Arabia also decline. The financial crisis in Saudi Arabia is due to the decline of oil prices from $147 per barrel in July down to $38 in December 2008 which is caused by the economic downturn of United States’ economy (Dhillon and Hakimian) It can be noted that United States is the most significant market of Saudi Arabia’s petroleum products. Thus, Saudi Arabia experienced more consequences of financial crisis. Other than the decline of oil prices, Saudi Arabia also experienced low economic growth because the revenues also lowered. As a result, the implementation of projects was also affected. Further, the finance from international companies investing business in the country was rarely available. Consequently, many Saudis experienced low salaries in the private sectors and the country experienced 15 percent rate of unemployment (Hamidy 2009). Laws, activities, initiatives performed by U.S in response to GFC Federal System The Federal Reserve System (Fed), a central banking system of United States, actively made effort in preventing the severe crisis of the country. The Federal Reserve implemented several policies in response with financial crisis. Before, only the bonds of treasury were qualified, but now the federal allowed other securities to be qualified like the mortgage-based securities. Aside from that, it was the first time that Federal expanded loans to financial banks. Fed learned a lot when the Bears Stearns investment Bank failed. So, they act as the last ‘lender of the resort’ to save the financial system of the country. Further, when the Lehman Brothers Bank was bankrupt, Fed took initiatives through giving financial assistance to an insurance company like the AIG--the biggest insurance company which controlled the credit default swaps (Moseley 2) Congress In 2008, the congress responded the problem through the submission of economic stimulus bill in which tax abatements, as well as tax cuts for businesses were included. Further, the Obama administration, as well as the democrats in Congress, also formulated the second initiative which highlights the $850 billion budget served as an aid for employment, education, infrastructure and projects of public works, and the one-third cuts for taxes specifically in payroll. In same year, the congress also submits an anti-foreclosure measure which enables the ‘refinancing of mortgages.’ Lastly, when the two huge mortgage companies Fannie Mae and Freddie Mac were in instability, the Treasury immediately responded through assuring to compensate all the debts (Marshall 26) Laws, activities, initiatives performed by Saudi Arabia in response to GFC In response to the financial crisis in 2008, Saudi Arabia made straightforward financing into banks, reduced the rates, and settled the government's assurance of bank deposits. They had successfully aiding the banking sector. Aside from that, the fiscal expansion program was implemented which aims to advocate growth outside the oil industry, uplifting improvement through extensive infrastructure projects, as well revived financing on health and education. The government also contributed large amount of money for telecoms and cement production. These industries are both predicted to have significant growth which can help recover the crisis (IMF 2) Moreover, King Abdullah formulated initiatives which include creation of jobs, extension of middle class and investment in education. King Abdullah addressed the Saudi’s consultation body known as Shoura Council which called for the creation of 200,000 jobs in the sector of education. In emphasising the trend of education, the King Abdullah University of Science and Technology was established. Most importantly, the university is the first co-ed university the country. The establishment of environment for both genders made a significant impact to the country’s economy as women workforce could now participate in the country’s workforce. These initiatives, in return, help improve the country’s welfare (Hinds) Conclusion GFC was considered as the most relentless economic recession since World War II. Global financial crisis began when there was a mortgage crisis in US and it was followed by bankruptcy of banking sectors which led to the downturn of US’s GDP, foreclosures of housing, and high unemployment rates. Fed performed initiative like allowing other securities like mortgage-based securities to be qualified and acting as the last render of resort. US’ congress also responded through passing the economic stimulus bill, giving budget for employment, education, and infrastructure, and one-third cuts for taxes. Meanwhile, Saudi also experienced financial crisis since the US’ imports and trading declined. Consequently, Saudi’s oil prices decline, business investments were barely available, and there were 15 percent unemployment rates. The government responded through investments of banking sectors, uplifting extensive projects on health and education, and creation of 200,000 jobs. Works Cited Bolton, Brian J. The U.S. Financial Crisis: A Summary of Causes & Consequences. USA: Portland State University, 2009. Print. BEA. Gross Domestic Product: Fourth Quarter 2008 (Final). USA: BEA, 2009. Print. Dhillon, Navtej, and Hassan Hakimian. Global Economic Crisis: A Catalyst for Change in Saudi Arabia? London: Cass Business School, 2009. Print. CIA. GDP per Capita (PPP)-Saudi Arabia. Saudi Arabia: CIA, 2009. Print. Hamidy, Abdulrahman Al. The Global Financial Crisis: Impact on Saudi Arabia. Saudi Arabia: Saudi Arabian Monetary Agency, 2010. Print. Hinds, Saudi Arabia: What are the effects of the global financial crisis on Saudi Arabia’s economic prospects? London: London School of Economics, 2010. Print. IMF. Understanding the Country’s Economy: Saudi Arabia. Saudi Arabia: Wamda, 2010. Print. Marshall, John. The Financial Crisis in the US: Key Events, Causes and Responses. USA: House of Commons Library, 2009. Print. Moseley, Fred. The U.S. Economic Crisis: Causes and Solutions.USA: Center for Economic Research, 2010. Print. Norgren, Claes. The Causes of the Global Financial Crisis and Their Implications for Supreme Audit Institutions. Sweden: Swedish National Audit Office, 2010. Print. Yeoh, Peter. “Causes of the Global Financial Crisis: Learning from the Competing Insights.” International Journal of Disclosure and Governance 7.1 (2009): 42-69. Print. Read More