Financial crisis - Assignment Example

Financial Crisis Outline Introduction 2. Types        a) Monetary crisis        b) Debt crisis        c) Banking crisis        d) Subprime crisis 3. Cases        a) Great Depression of 1929        b) Asian Financial Crisis of 1997 c) Global Financial Crisis of 2008 4. Impacts        a) Great blow to import and export industries        b) Stress in the job market        c) Increase in foreign exchange risk and capital market risk        d) Negative effects on global financial assets and peoples daily lives 5. Remedial Measures        a) Policy Regulation        b) Seeking aid        c) War or not war 6. Conclusion 1. Introduction The application of the term financial crisis in various fields and sectors of the economy cannot be overemphasized. Due to high liquidity of the financial assets, the financial crisis has a tendency of diffusing quickly to a number of number of global economies. The fuse can be the financial products, the markets, or the institutions of any countries in the world. Currency devaluation, price slump of financial assets, stock and bond market crash, and collapse of firms and institutions are all common phenomena in a financial crisis. To further understand this financial phenomenon, it is important to put into perspective its causes, development, impacts, and solutions. 2. Types of financial crisis There are four types of financial crisis which include: Monetary crisis Debt crisis Banking crisis Subprime crisis Monetary crisis Monetary crisis occurs due to political instability and speculative attacks that effectively provoke financial institutions or the central banks to raise the interest rates as a measure of avoiding capital flight. Monetary crisis also occurs when there is a depreciation of the monthly percentage of the exchange rates and a decrease in the reserves that surpasses the mean by almost three standard deviation. Debt crisis The debt crisis is one of the fundamental challenges affecting most of the world economies with a classic example being the Eurozone crisis. The crisis is caused by recession that cause most of the economies not to owner their pledges in so far as repaying their debts is concerned. Debt crisis is caused by a number of complex factors that combine to exert pressure on respective sectors of the economy. Additionally, the crisis occurs when there is no balance between the revenues and the public debt. Banking crisis Financial crisis in the banking sector is sometimes caused by a combination of complex factors that otherwise affect capital gain of certain institutions. Banking institution is dependent on the deposits that make it possible for them to lend customers and institutions in terms of loans. There are two events that cause banks to run into a crisis. When a bank lends to customers and the depositors demand the money, it becomes difficult for the institution to meet such obligations effectively leading to a crisis. A bank can be insolvent when the deposits by customers are lost, especially when there is no guarantee from the insurers. Subprime crisis The subprime crisis is largely manifest in the mortgage industry where scrutiny of borrowers is not appropriately done. Essentially, when mortgage institutions offer loans to borrowers in amounts they cannot afford it quickly degenerates into a crisis because customers becoming incapacitated in terms of repaying the loans. Some loans provided by the creditors exhibit high-interest rates effectively leading to a foreclosure (Shiller, 2008). 3. Cases Great Depression of 1929 The great depression was the first financial crisis ever to affect economies on a planetary scale. The timing of the crisis had certain variations with some experiencing it from the year 1929. In 1929, the crazy stock speculation finally set off an economic catastrophe, which is called the Great Depression (Berton, 2012). On October 24, the stock prices on the New York Stock Exchange fell like an avalanche. People sold their shares and stocks hysterically dropped. The exchange hall echoed with the cry of despair. That day became the Black Thursday, which triggered the economic crisis in the United States. In 1930, the crisis spread to many nations with several global economies experiencing an economic downturn (Berton, 2012). The great depression affected countries, both at the core and the periphery. Profits, incomes, and revenues registered significant drops. World trade was not spared either as it plunged to a record low of almost 50% (Berton, 2012). Each sector was adversely affected with industrial institutions being the worst affected. The crisis was an indication of how the world economies can decline due to the financial crisis. Unemployment Rate During The Great Depression Global Financial Crisis of 2008 The financial crisis of the period between 2007 and 2008 was one of the worst financial crises since the great depression. It had far reaching implication on the financial well-being of major world economies even those at the periphery. Most financial institutions such as banks almost collapsed due to the inherent crisis. During 2007-2008, since investors began to lose faith in the value of mortgage-backed securities, which caused a liquidity crisis, Global Financial Crisis of 2008 (Krugman, 2009). The national governments bailed out institutions such as banks to stop further proliferation. However, the stock markets around the globe were immensely affected even with the bailouts being established (Krugman, 2009). The crisis had negative effects on the economies to the extent that it leads to closure of key enterprises, reduced wealth by consumers and volatility in the markets. Most people lost their jobs while some got evicted from their premises due to the economic slump. Global prices of commodities as oil, copper, and other critical commodities were immensely affected (Krugman, 2009). Sectors of the Economy Affected Global Financial Crisis of 2008  Asian Financial Crisis of 1997 Financial contagion was one of the greatest fears as a result of the crisis in the Asian territories in 1997. Thailand was the first victim of the financial crisis with the national government being forced to float the ‘baht’ due to inadequate foreign currencies (Zhuang et al., 2002). The currency eventually collapsed due to mixed factors such as bankruptcy. Most currencies in the East and South Asia suffered tremendously from the financial crisis (Zhuang et al., 2002). Stabilization of the domestic markets in Asia failed to realize the objectives. The 1997 Asian Financial Crisis was caused by the idle fund in the financial market, improper foreign exchange policy, and unreasonable foreign debt structure (Zhuang et al., 2002). 4. Impacts The impacts of the various financial crisis on global economies cannot be overemphasized. The processing and manufacturing industries were the most affected during the financial crisis. Import and export industries are in the spotlight during the global crisis since they are the key to connecting the economy in different countries. Such tendencies made those industries be battered the worst and the most directly. Consequently, profitability and effectiveness of the industries suffered significantly due to the crisis. Financial crisis cannot be limited to a single section of the economy because each entity requires capital to increase their leverage and portfolio in the market. To this extent, industries and financial institutions like banks become immensely affected. In a financial crisis, even big companies are likely to collapse in one night. The bankruptcy of many companies will give greater stress in the job market. For instance, in 2008, millions of people lost their jobs with a number of people being evicted from their houses due to the subprime crisis (Shiller, 2008). Market volatility and complex combinations define the extent to which a currency remains relevant in the economy. Since the currency value, stock price and product value are very unstable; the foreign exchange risk and capital market risk will be increased dramatically. Also, the global financial assets and people’s daily lives will be affected negatively by the inflation, close-down of companies, and decrease of wages (Shiller, 2008). The economic downturn is also a possible effect of financial instability. 5. Remedial Measures To save the situation during a financial crisis, the first important thing to do is controlling the economic behaviors by policies and regulations. So making effective policies and correct strategies are necessary. The policies should be formulated to enhance economic recovery and enhance growth as appropriate. Policy formulation should be geared towards ensuring that the financial institutions such banks strictly adhere to the monetary guidelines established by the authorities (Nasution, 2014). A second way to save the national economy is to seek aid from foreign countries. The IMF and World Bank can provide financial incentives to assist in economic recovery, as well as growth. Cooperation and Union can help both sides pull through the crisis better and faster. The last remedial method, which is also the most controversial one, is revitalizing the national industries through a war. War has the potential of assisting in economic growth and recovery though its consequences exhibit inherent negativities. Revitalizing the national industries through a war must be driven by the people as a measure of achieving the predetermined objectives. However, the remedy manifest a number challenges and is, therefore, unwise and undesirable. 6. Conclusion In all, we must take lessons from the past experiences to avoid or minimize the shock of the financial crisis in the future. First of all, financial innovation cannot lack government regulation. Additionally, The mutual assistance between or among countries in the international system is important during a crisis. Finally, sustainable economy is healthier and more feasible, and should be advocated and emphasized. References Berton, P. (2012). The Great Depression 1929-1939. Toronto: Anchor Canada. Krugman, P. R. (2009). The return of depression economics and the crisis of 2008. New York: W.W. Norton. Nasution, A. (2014). Macroeconomic Policies in Indonesia since the Asian Financial Crisis of 1997: Indonesia economy since the Asian financial crisis of 1997. Shiller, R. J. (2008). The subprime solution: How todays global financial crisis happened and what to do about it. Princeton, .J: Princeton University Press. Zhuang, J., Dowling, J. M., & Asian Development Bank. (2002). Causes of the 1997 Asian financial crisis: What can an early warning system model tell us?. Manila, Philippines: Asian Development Bank. Read More