Global Financial Crisis - Essay Example

Name : xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Tutor :xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Title : Global Financial Crisis Institution : xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date :xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx @ 2011 Global Financial Crisis Global financial crisis can be referred to as a situation where the demand of money rises relatively to the amount that is being supplied in the economy. This crisis affects most parts of the world whenever it occurs because the demand of money and its supply takes place globally. Most countries in the world focus on maintaining the pace at which money is supplied so as to avoid this crisis. The rate of foreign exchange also contributes a lot to global financial crisis because there are currencies that are more valuable than others in the modern world. The rate of inflation rises drastically whenever there is a global financial crisis since meeting the demand of money that is in supply is quite hard. The global financial crisis that occurred between 2007 and 2010 is one of the worst that has ever taken place in the world since 1930’s when there was a great depression. This crisis is believed to have been triggered by shortfall of liquidity in the system of banking in the United States. This shortfall of liquidity contributed a lot to the collapse of great financial institutions, the manner in which national governments bailout banks that have debts and the decline of stock markets globally. The financial crisis also affected housing markets and this resulted to evictions and vacancies that were prolonged. Most people who worked in the financial institutions and housing markets ended up losing their jobs and some of the institutions also got closed down. Most of international business that was considered to be key businesses was also affected since most of them failed drastically. Consumer wealth also declined greatly estimating to trillions of dollars from the United states that were lost, loss in the financial commitments that the governments incurred and a decline in the economic activities that were considered significant. Experts have suggested very many causes of financial crisis in the modern world and many solutions have been offered and others implemented while others are still being put into considerations but the world economy still remains at a very high risk since the solutions that have been offered are still not yet sufficient. The solutions and suggestions that were offered were to ensure that the global financial crisis has been handled effectively in order to avoid the same crisis that took place in the previous years to occur in 2011. Overview The housing bubble peaked in the year 2006 but later on it collapsed causing the securities in the United States to become very tight. The pricing of the real estates also contributed to the damaging of the financial institutions all over the world. Questions that were associated with solvency in the bank, declines in the availability of credit and the investor confidence that was damaged made a big impact on the markets in the global stocks since there were large losses by the securities towards the end of the year 2008 and the beginning of 2009. International trade went down during this period since economies were slow all over the world and that credits had been tightened. Many critics came up with their views claiming that the agencies responsible for credits had failed in making accurate prices of risks that were involved in financial products associated with mortgage and that governments had also not adjusted regulatory practices that they had in accordance with the practices in the financial markets in the 21st century. Central banks and governments from different parts of the world responded quickly to these views and decided to expand monetary policies that existed and also decided to bailout some of the existing financial institutions. Background In the year 2005-2006 the Housing bubble of the United States burst out and this is what triggered the global financial crisis immediately. After this event is when the prices of other commodities in the global markets started rising rapidly and banks decided to give large amounts of loans to land owners who seemed to be having the potential and there was also rise in the housing price. The banks believed that if the house owners would take up more loans, they would be able to pay it in bigger amounts because of the interests. When the interest rates started rising, the housing prices started dropping drastically and this was against the expectations of the banks. This was a great loss to the banks because they did not expect the interest rates to rise thus financing became one of the most difficult things to do in some of the states especially in California. This resulted to the rise in number of the foreclosed homes. Due to this, the world economy had to find possible ways in which it would reduce the interest rates on housing so as to counteract the losses that were being made by the banks. This meant that something had to be done by the Federal Reserve of the United States in all possible ways so as to decrease the interest rates of the houses. The prices of houses in the United States rose insignificantly between the year 1997 and 2006. in the 1990’s, the United States was able to control the pace at which interest rates on housing bubble was moving and it was able to reduce it and it was being backed up by the Federal Reserve in the United States. The rate at which the world economy was receive foreign funds made it possible for it to reduce the interest rates on housing and this also made it possible for land owners to acquire credits and pay them at a benefit for the central banks. It was easy to acquire loans on the houses and other credits also since the inflow of cash was reasonable thus housing bubble was possible. There were loans of very many types and these included credit cards, auto and mortgage. The consumers were able to obtain them and they also assumed debt loads that were unprecedented. Investing in the housing markets in the United States was very possible because there were very many financial innovations that took place such as the Mortgage-backed securities and the collateralized debt obligations because this is where they were deriving their value from the prices and payments of mortgage. Significant losses were reported by investors in the United States after they realized that the housing prices were declining drastically and financial institutions that had borrowed some credits also declared great losses. The falling of prices of homes that were less than the loans given for mortgage made it possible for financial incentives to enter into the foreclosure. The financial crisis has expanded a lot in the world economy after affecting the housing prices in the market and it now affects other sectors of the economy. The epidemic of the ongoing foreclosure that started in the year 2006 has continued to drain the consumer’s wealth thus eroding the strength of the institutions in financial banking. Trillions of dollars have totalized the global losses made by the financial crisis in the United States. Reforms on Global Financial Crisis Knowing which sector of the economy makes more impact in the society is a very hard question to tackle for many reasons. One of these reasons is that some sectors in the economy are considered to be clean while others are not. The question at hand when focusing on the reforms on global financial crisis is how sustainable a business sector can be. When a sector of the economy is considered not to be sustainable, then it is evident to say that it is the one that affects operations taking place in the economy. All sectors of business in the modern world face different challenges and this is because of the changes that take place in the modern market. One of the most challenging factors in the society is the fact that the level of technology keeps changing time to time. Business sectors that are not updated with the technological changes taking place are likely to be affected greatly. Most sectors of the economy have been scrutinized over time so as to conclude which sector has the tendency of growing rapidly or falling drastically but this survey cannot really be depended upon because things change rapidly in the modern world. One sector could be on top today and another one tomorrow thus making it hard for conclusions to be made. The manner in which some of the sectors of finance behave threatens their stability in the modern markets. Some reforms have been suggested in order to reduce global financial crisis and some that have been put into consideration are the seven reforms by Hazel Henderson. She came up with these reforms after critically analyzing factors that led to the crisis. She came up with seven reforms that could be effective if well implemented and these are 1. Trading with 1% Tobin Tax should be discouraged; 2. Relocating the expenditure of the government on international forces 3. Restructuring monetary systems 4. Criminalizing tax havens 5. Regulating financial instruments 6. Reining in executive compensations and finally 7. Reducing the influence of houses for investment on their rating agencies. The first reform is very strict on the percentage of taxing because of the fact that low percentage might make it hard for the level of financial crisis to reduce. Most governments tend to use a lot of money for sustaining the military forces and this ends up affecting the global financial status because the amount spent is too much than what should be spent. The expenditure on military should be reduced and some of it should be relocated to other sectors of the economy and this reform will be effective. Monetary systems should be restructured so as to have a system that is very effective and can be sustainable in the economy thus reducing the rate of financial crisis in the modern world. Making tax havens illegal is also one of the ways in which global financial crisis can be reduced in the modern world because most of tax havens operate illegally with a lot of corruption attached to them. Financial instruments in most parts of the world tend to be very corrupt and this is the reason as to why most of the cash that flows in the economy is seen to be disappearing without explanations and finally affecting the global economy. Reining on the compensations given to executives is the sixth reform that was put towards fighting global financial crisis. The prices being put across by rating agencies should also be reduced because it is influential in global financial crisis increase. Read More