Financial Crisis of 2007 and Poverty - Essay Example

Financial Crisis of 2007 and Poverty Introduction- Economic Crisis of 2007 The United s being the financial hub of the world in the 21st century has had its financial policies mirrored all over the world. With dollar being the base of currency rate evaluation and most of the worldwide financial institutions like the World Bank and IMF housed in the United States it is no surprise that the negativities of the US economy had an impact all over the world too. The economic crisis of 2007 is said to be one of the worst economic crisis to have affected the world since the great depression of the 1930s. The main cause is said to be the collapse of the housing bubble in the US. When the estate prices started to rise, so did the demand for mortgage backed securities. Inflated rates were quoted in order to obtain more finances using the existing property, mortgage backed securities were used to keep collateral at banks for loans. Soon multiple securities were issued on the same property in anticipation of rising property rates and value. However, the burst of the housing bubble led to a fall in the property prices. This had a domino effect on the mortgage backed securities that had gained a momentum and soon financial institutions suffered as defaulters had not kept their money worth as a collateral ultimately. There are several other implications that this lapse in property led to but other factors also played a role in maximizing the impact. One such factor is the fraudulent underwriting processes that enabled the repurchase of loans. In a nutshell, almost all aspects of the financial system in the US collapsed one after the other and this had its impact worldwide. This paper is aimed at highlighting the several issues that emerged as a result of the economic crisis that accrued in the year 2007. Since this crisis has an impact on a massive scale, it wouldn’t be wrong to say that it impacted the economy of almost every country of the world. From the masses point of view, financial crisis meant an increase in unemployment. This led to lower standards of living, poverty, negative health implications and a significant increase in the crime rates all over the world especially the US. Thus, the chosen economic issue that resulted from the economic crisis is poverty. Poverty Poverty refers to insufficient means of living in terms of lack of funds, health support and general living conditions. Since the financial institutions impacted firms of all levels, the inadequacy of resources on their part due to recession led to significant layoffs. Educated and experienced human resource of major countries of the world was deprived of a decent means of earning a living. This had an effect on their living conditions as more and more people became prone to poverty. Joblessness led to increased poverty so more populations suffered from a decreased standard of living. The poorer became poorer and the well-off had their hands tied for living expenses. Property became worthless and unavailable thus significant lack of shelter also resulted. Poverty led to many health related issues as well including stress and lack of health support or insurance. Declining health standards, lack of funds and the accumulated frustration from all these aspects resulted in an increase in crime rates. This is because when people exhausted themselves in finding work and failed, they resorted to burglary, theft and pickpocketing and so the crime rates also increased worldwide. A brief overview of the resulted conditions in specific parts of the world is discusses further. United States- post recession According to the U.S. Census Bureau’s American Community Survey published in September 2010, the poverty rate has increased to 14.3% of the population which was the highest since 1960 and meant that one out of seven Americans lived under poverty. A poverty statistics survey also highlighted the median income per household as being the lowest since 1997. When the income per household decreases, it is almost bound to have an effect on the household formation as well. As a result the marriage rates have gone down and the women who gave birth also declined but 2.2%.this is because the marriage rates and birth rates are also associated with the financial soundness of a couple and the extent to which they can support another life. Thus, poverty can have an effect on many aspects of the society. As mentioned earlier, it causes a rise in the crime rates as the disparity between the rich and poor widens.it is also because the most affected from recessionary trends are the middle class because it causes them to move towards the lower income segment. The rich become richer due to the rebound of recession but the middle class has to strive hard to gradually regain their social and financial position. Consumption and savings patterns also change as a result since the masses spend whatever meager amount they earn. Thus, the savings also decrease and the financial pattern is drastically changed. From the masses, the focus changes from standard of living to survival. This is also attributed to the government’s change in budgets that are more concerned with reviving the financial system then to provide welfare to the people. Thus, this has a domino effect and the investment in education and health become lesser. Like mentioned earlier, the US is a super power and its financial condition trickles down to the rest of the world. In a situation where this country is suffering from such severe consequences of recession, the developing and under-developed world has fared worse. This brings us to an overview of the poverty statistics from all over the world post-recession. Worldwide poverty Canada faced a loss of almost half a million jobs as a result of recession. This created a widespread joblessness and the governments’ measure to create temporary jobs was gradual and did not cater to the problem immediately. As a result the sufferers became poorer over time and their poverty was accompanied by homelessness. The government failed to support home schemes and thus, property became too expensive for the masses. Thus, recession had a huge impact in the country and several aspects of people’s lives were affected by it. The scope of the problems was so large that the effects haven’t worn out even as of this day and homelessness remains one of the key issues in Canada. Studies show that females all over the world were more affected as a result of recession. This trend is prevalent especially in the under developed world that is worse affected by recession. Since female education is not a priority there, many drop out of schools. For example, in post-recession Cambodia young girls were forced to drop out of schools to become domestic workers in order to survive in testing times. A study showed that Nicaraguan women saw declining health states due to their financial constraints that forced them to lower their food intake in order to ensure that the men and children of the household were not deprived. Greek statistics also showed that the unemployment level amongst females was higher as compared to men (67% to 44%). According to Nigel Chapman, Plan (NGO) Chief Executive Officer, many women from under developed and developed countries have also resorted to becoming sex workers in order to survive. This has brought about a significant increase in the practice of prostitution in such areas (Prois). Many of the under developed countries rely on foreign remittances for their survival. One member of the family works in the high income countries to earn enough to send back to his family in the home country. With the lapse of the economy of these high income countries, the remittances were also affected and thus, the families relying on the foreign earnings were forced to live by whatever little they could earn themselves or had saved. They had to compromise of education, health and nutrition. In this way, the situation in such countries worsened significantly. Malnutrition has contributed towards rising infant mortality rates with an additional 200,000 to 400,000 deaths each year from now to 2015 if the situation does not improve (UN, 2009). The worsening poverty conditions all over the world could also adversely affect the millennium development goals that set back progress towards meeting the first goal of reducing poverty by 50% and delay it for up to 3 years. (Alexander, 2008). Recovery Status- Post Crisis Analysis on Poverty Since the start of recovery from financial crisis started in 2009, there were several concerns about whether the problem of poverty can be dealt with at the same pace at which it accelerated. According to the New York Times, in the first year of recession poverty in USA rose by 1.7 million as a result of wide spread lay-offs and unemployment (Log In - The New York Times). The government took significant steps in the post-crisis era and managed to get the situation under control. Jobless benefits, social security, food stamps, tax credits for workers etc. are just some of the many measures taken to tackle the problem of poverty. However, the republicans have proposed cut down in the welfare programs that provide employment to millions of people as they were a temporary set up to provide relief to the people. In the long term, taking on such a drastic expense is not feasible for ay government. Even if the financial and banking system has strengthened, it is basically contributing towards corporate profits and the disparity between the wages of the higher level management is said to be almost 200 times higher than that of the subordinates. Thus, the government needs to look into a sustainable strategy that a provide job security to the people and take them out of the poverty circle. Canada experienced a mix of recovery and has so far been unable to bring down its unemployment, homelessness and poverty levels to the pre-crisis ones. The rate of unemployment was 6.1% in 2008 and rose to 8.7% in 2009. The current rate is approximately 7.1%. Out of the 1.11 million unemployed people in Canada, 1.36 still remain jobless. Creation of jobs have been steady with around 246,000 jobs introduces in 2012. Housing has not been a strong feat either and homelessness has increased significantly (GRANT). In UK, the financial crisis had its effects too. When the banking system collapsed, people lost their jobs and homes. Poverty conditions worsened from the pre-crisis state. The government had hefty debts to pay off thus the national health services started providing selective welfare and the value added taxes also increased from 17.5 to 20%. The development from this state to the current one has been slow like the other countries of the world. Like mentioned earlier, the poorest nations of the world were hot the hardest. As the conditions in the developed world worsened, the remittances that were transferred from those countries to the under developed countries decreased significantly. Thus, the poverty conditions worsened significantly. Asian countries were not affected by the subprime mortgage crisis however; they faced volatility in their stock markets in currency valuation due to the uncertain economy of the west. Other regions of the world like Africa and Latin America saw a significant decrease in the aids that were provided to them by the developed countries (Shah). Over time, the recovery period has encourages these countries to resume their aid funding but the damage done to the already poor conditions in these countries has not been fully covered yet. The changes and reforms as a step towards the recovery of the financial system of the major countries of the world have proved to benefit only the business aspect and the higher level of the management while the masses remain poverty stricken and burdened by the after math of the financial crisis even after 6 years have passed. Proposed solution/ Conclusion Even though the recovery has been significantly stable in the high income countries of the world, it is important for them to address the conditions that prevailed all over the world as a result. Eliminating extreme poverty is taken by the G20 countries to be their job. Poverty is not an issue that can be tackled overnight. The process is gradual and requires a strategic mindset and set of plans to be implemented. However, the main concern should be the unison of the major countries of the world in doing away with worldwide poverty. If it can be attributed to the American economic meltdown, it would not be unwise to suggest a global poverty elimination program that helps in eradicating the problems form the parts of the world that face it’s most drastic after effects. For the government it is essential to realize that even though poverty rates are decreasing there is a significant amount of population that still lives below the poverty line since the recession. The welfare of these citizens should be made a strategic priority as their living standards are as important as those of the higher income segments. If the disparity between the rich and poor widens there is also a chance of a social outrage that may make the whole situation worse. Global summits held to reduce global poverty rely on outdated statistics to check the progress of poverty elimination. Thus, the credibility or validity of the decision made in such summits is also questionable. Measures should be taken to come up with accurate information and statistics that can help in effective evaluation and eradication of poverty (CIGI DSpace: Poverty in Numbers: The Changing State of Global Poverty From 2005 to 2015). Businesses can play a significant role in eradicating poverty, as the decrease in capital inflow and demand are two major issues that lead to conservative spending from their side. If the government focuses on strengthening the financial sector and restore people’s faith in it they are bound to encourage businesses to stimulate investment, develop trade and be open to the creation of jobs and innovative schemes to offer job security (Coming out of Recession: The Role of Business in Alleviating Poverty | World Bank Institute (WBI)). International leaders can make play a significant role in eradication the post-recession poverty by reforming the World Bank and empowering it to advance aids to the countries in dire need and developing a strategy to meet the Millennium Development Goals (Alex and Er 118--120). Social protection programs should be initiated in poverty stricken countries to hamper the increase of the people moving towards poverty. National governments should monitor the immediate a long term affectees of poverty to ascertain priorities and allocate resources accordingly. Also, priority should be on eliminating the immediate poverty segments and focusing on economic growth and stability for the medium term as well. For countries of the developed world that can extend support and aid to poverty stricken areas of the world it is essential that they focus on their state run programs in such areas and mentor progress on the most recent basis (Mccord and V et al.). References: Alex and Douglas Er. "The impact of the economic crisis on the world’s poorest countries." Global Policy, 1. 1 (2010): 118--120. Print. Mccord, Anna, V and Milo Emoortele. "The global financial crisis: Poverty and social protection." Evidence from, 10. (2009): Print. Prois, Jessica. "World Is Failing Girls And Women Amid Global Recession: Report." The Huffington Post, 2014. Web. 7 Mar 2014. . Unknown. "CIGI DSpace: Poverty in Numbers: The Changing State of Global Poverty From 2005 to 2015." Dspace.cigilibrary.org, 2014. Web. 7 Mar 2014. . Unknown. "Coming out of Recession: The Role of Business in Alleviating Poverty | World Bank Institute (WBI)." Wbi.worldbank.org, 2014. Web. 7 Mar 2014. . Alexander, D. (2008) ‘The Impact of the Global Economic Downturn On the World’s Poorest Countries’. Speech at the London School of Economics, 10 December 2008. Available from: http:// www.dfid.gov.uk/Media-Room/Speeches-and-articles/2008/Theimpact- of-the-global-economic-downturn-on-the-worlds-poorest-countries [Accessed 29 October 2009]. United Nations (2009) Voices of the Vulnerable: The Economic Crisis from the Ground Up. New York: GIVAS (UN). Unknown. "Log In - The New York Times." Nytimes.com, 2014. Web. 12 Mar 2014. . Shah, Anup. "Global Financial Crisis — Global Issues." Globalissues.org, 2014. Web. 12 Mar 2014. . GRANT, TAVIA. "Five years after the financial crisis, Canada’s recovery remains mixed." The Globe and Mail, 2013. Web. 12 Mar 2014. . Read More