The Effects of the Global Financial Crisis on Trading Nations - Essay Example

Running head: Policies to address the effects of the Global Financial Crisis on trading nations Student’s name Institution Course Professor Date The bursting of the U.S housing market bubble has ignited a ripple impact that has grown to major proportions and is causing havoc on market after market and county by country as they try to mitigate the impact of global financial crisis (World Bank, 2009). The consequences of this crisis such as immediate loss of trillions of dollars in wealth increase in the level of unemployment and historical decline in economic activity have caused hectic challenge to many policymakers. According to the ILO, an amalgamation of unsuitable financial regulations, excessive risk taking by specific financial intermediaries together with inefficient remuneration practices in the financial sector has contributed heavily to global financial crisis (Nanto, 2009). This crisis has affected central government revenue via decrease corporate taxes in private activity exercise, decreased royalties and import taxes. Rodriguez-Pose and Gil (2005), noted that lack of strict regulations for local borrowing, a division between fiscal freedoms and objectives can contribute agency problems thus emergence of financial disarray. Making of policies should correspond with the nature of the crisis. Care should be taken that ensure that policy making is pro poor to avoid elite capture (Bisignano, Hunter and Bank for International Settlements, 2000). This crisis created a risk of intergovernmental fiscal transfers from reduction of budget allocation as government use it as an excuse for political gains. Consequently all the relevant authorities ensure that they address it via evidence-based advocacy for the purpose of sustaining government investments for long term growth. As the crisis heightened policy makers have shifted focus from financial institutions and loosened monetary values to shoring up manufacturers operating in real economy and expansionary fiscal policy (Blanchard, 2009). The fallout for global trade both in volumes and the pattern was drastic as it had been predicted by OECD that volumes may shrink by 13% in the year 2009 from 2008 levels. Many policies advocated are to maintain this global financial crisis and to carry out necessary procedures to promote recovery and reforms in the financial market sectors both in United States and other affected countries (Blanchard, 2009). The government replied by easing both monetary and fiscal policy that had effects on financial and trade flows. According to projected growth rates by Global Insights showed that there was concurrent downturn with the advanced industrialized countries of North America, Europe and Japan declining into recession and a slow-down in economic growth rates in both developing and emerging markets (World Bank, 2009). There is need to contain and strengthened many financial institutions via varied financial packages so as to restore balance sheets of financial institutions and creating confidence in markets (BOJ, 2009). The slowdown and recession in world economies must be dealt with at all cost with the help of various stimulus packages. In addition, global financial crisis has caused detrimental impacts to most of the country’s economy, therefore, this calls for a change in financial regulations and building of oversight and a prohibitive architecture as to inhibit future crisis and correct past abuses of the system. Many countries have realized that there are potential political and security impacts of the global financial crisis (Desai, 2011). For example the United Kingdom formed National Security forum to inquire the security implications of the recent global crisis. Moreover, there is need to invest in early warning poverty and vulnerability and vulnerability data systems for faster release of quantitative and qualitative indicators of the consequences of the global financial crisis especially on poor and unemployed people. Consequently supporting vulnerable business ventures in rural areas specifically to cope with inadequate credit facilities and reduced demand in export markets (Savona, Kirton and Oldani, 2011). Understanding country’s strategic interests and motivations such as China will improve collaboration in the objectives of reused but sustainable growth, poverty eradication and attainment of millennium development goals. Efforts for it to put into practice, policy makers must understand the way in which the global financial crisis is being viewed in varied parts of the world and how this perspective shape the types of solutions which are possibly accepted by many. In this instance, efficient mechanisms of global financial governance will require abundant participation and enormous agreements from developing county government (Tony, 2009). Domestic industries and business venture were shelved via assemblage of domestic subsidies and border harbouring. Banks to be prevented from securitization process, since they are public utilities and are serving the general public. For example if they are allowed to access government bailouts and guarantees, they should not be permitted to securitize since it will undermine good underwriting procedures. Job guarantee through a government provided employer of last resort program if implemented will solve the problem of unemployment in the long run (Mishkin, 2009). Other measures include reregulation of the financial regulations by proper incentives in place that will discourage lender fraud. Moreover, giving support to unions, improving the wages at bottom faster than top managements and shifting of government policy that will favour consumption and government spending. Alternatively, global financial crisis caused a sharp decline in consumer wealth and economic activities. Most mortgage loans extended to borrowers at exhibitant terms, weak oversight and poor supervision of the banks and financial institutions and excessive relaxation of fundamental rules and regulatory requirements for financial institutions speeded this crisis. To most African countries, active fiscal policy is paramount to cushion the impacts of global financial crisis. In addition, international financial institutions ought to provide support other nations that are being faced by external payments problems and economic crises (Taylor & Weerapana, 2009). Reduction of policy conditions that are placed on loans facilities need to be taken into consideration so that affected nations can respond effectively to this economic down turn. Indeed, a case study that involved African countries were advised to demonstrate care in the management of goods and services revenue during the period of booms so that they can create a space for counter cyclical fiscal policy responses in a later date (Lomborg, 2004). The incentive championed were infrastructure development, advancement of technology transfer by foreign investors and enhancing manufacturing export competitiveness. Moreover policy flexibility will allowed a particular States to impose capital market restrictions especially in situations where capital flows threatens the stability of the domestic financial system and the economy at large (United Nations, 2009). Careful utilizations of prudential regulations, reserve accumulation and controlling of capital have assisted many economies to be protected against the recent global financial crisis. Conventional monetary policies have been implemented in a co-ordinated effort to stimulate growth and stabilization of the global financial system with various central banks slicing their policy interest rates since September 2007 (Tony, 2009). In Australia, the Reserve Bank of Australia expanded liquidity in the overnight cash market through open market purchases thus reducing the interest rate. Liquidity provision directly to borrowers in terms of non-conventional policy has allowed freeing up of credit flows and in the long run improved balanced sheets of the financial institutions. The central banks motivated stability and confidence in the financial sector because risk aversion decreased drastically resulting in lower premiums, extensive maturity time frames and credit spreads. Many African countries have developed policies to cushion them against the adverse effects of global financial crisis (Ariff, Farrar, and Khalid, 2012). These policies included; reductions of interest rates, financial institutions recapitalization, means to increase liquidity to banks and organizations, fiscal stimulus, changes in the trade policy and regulatory reforms. Moreover the adoption of these policies was influenced by the degree of vulnerability to the financial crisis and availability of fiscal space. Consequently, other nations opted to set up a task force to assess the state of the financial crisis and later supplied their government with tangible recommendations on ways to respond to any crisis in a later date (Ariff, Farrar, and Khalid, 2012). Countries such as Tunisia, Benin, Mali and Guinea-Bissau have established new deposits and provision of credit services. These have made them to progress the flow of credit and in the long run heighten the liquidation level in the banking sector. A country like Kenya has enacted a legislation that increased the minimum capital requirement for various banking institutions from two hundred and fifty million shillings to a billion shillings by the year 2012 (Morgan, 2010).Fiscal incentives packages have been utilized by many nations to cushion the effects of global financial crisis and also for expanding their economic growth. Other stimuli used were; improve accessibility to credit facilities, vocational training for the workforce, tax incentives and limited incidences of corruption. There is a need to carry out a comprehensive review of the regulatory and supervisory regimes. These policies allowed financial institutions to be examined for proper oversight and regulation thus will reduce intemperance taking of risks (Taylor & Weerapana, 2009). Implementation of macroeconomic policy and structural measures in the continent of Africa has reduced the effects of financial crisis and heighten the foundation for sustainable growth. Apart from financial stability, potential negative social consequences of financial crisis should be taken into consideration. Fiscal stability policies were achieved via revenue mobilization and effective management of expenditure (Taylor & Weerapana, 2009). The monetary policies ensured money supply was controlled so as to meet the inflation and already set economic growth targets. To solved this global down turn, the International monetary fund made some strategies to issue emergency liquidity assistance, improve supervision of the financial sector and taking of comprehensive technique to assessment of financial sector stability (Müller, 2011). The parliament of Tanzania approved the plan that would limit the effects of global financial crisis by allocating safety nets to avoid extreme vulnerabilities. This allowed it to protect economic growth and hence more jobs were created and enough food to the citizens. The G20 member states choose to strengthen the mandate of the financial stability board (FSB. Together with International Monetary fund, FSB provided early warnings of both financial and macroeconomic risks and furthermore policy recommendations for various national governments. The European Union has succeeded in financial re-regulation through amendments to the capital requirements, regulations of credit rating agencies and regulation on short selling. These policies were able to champion the following; the adoption of crisis regulation procedure, well-coordinated banking institutions regulation and supervision and regulation of security markets (Kaberuka, 2009). In the United States, as a technique to cushion her from global financial crisis effects, the distinct policy proposals were put forward. They were; enhancing transparency and accountability and sharing of information on risks that were independent on credit rating agencies, improvement of procedures that mitigate risks and finally adoption of latest methods and strategies to compact with systemic risks (Ahmann, & Lawder, 2009). References Ahmann, T. & Lawder, D (2009). U.S Fiscal policy to be “very aggressive”:Geithner.Thomson Reuters Andreas Müller, (2011).Financial Crisis- Impacts and Reactions, GRIN Verlag. Bjorn Lomborg, (2004).Global Crises, Global Solutions, Cambridge University Press. BOJ (2009). The Bank of Japan’s Policy measures in the Current financial crisis. BOT (2009). The impact of Global Financial Downturn and the Government stimulus package Celine Tan, (2011).Governance Through Development: Poverty Reduction Strategies, International Law and the Disciplining of Third World States, Taylor & Francis. Dick K. Nanto, (2009).Global Financial Crisis: Foreign and Trade Policy Effects, DIANE Publishing. John Taylor, Akila Weerapana,(2009).Principles of Macroeconomics: Global Financial Crisis Edition, Cengage Learning. Joseph Bisignano, William Curt Hunter, Bank for International Settlements, (2000).Global Financial Crises: Lessons from Recent Events, Springer. Kaberuka, D (2009). Start this engine: Africa’s Policymakers should prepare for global recovery by priming their private sectors. Finance and development Marcos Chamon, Mahvash Saeed Qureshi, Dennis B. S. Reinhardt, Atish R. Ghosh, Karl Friedrich Habermeier, Jonathan David Ostry,(2010).Capital Inflows: The Role of Controls ,International Monetary Fund. Mishkin, F.S. (2009). Is monetary policy effective during financial crises? American Economic Review, 99,573-577 Mohamed Ariff, John Farrar, Ahmed M. Khalid, (2012).Regulatory Failure and the Global Financial Crisis: An Australian Perspective, Edward Elgar Publishing. Olivier J. Blanchard, (2009).The Crisis: Basic Mechanisms and Appropriate Policies, International Monetary Fund. Padma Desai, (2011).From Financial Crisis to Global Recovery, Columbia University Press. Paolo Savona, John J. Kirton, Chiara Oldani, (2011).Global Financial Crisis: Global Impact and Solutions, Ashgate Publishing, Ltd. Richard Morgan, (2010).Lessons from the Global Financial Crisis: The Relevance of Adam Smith on Morality and Free Markets, Taylor Trade Publications. Tony. (2009). European reaction to crisis suffering from lack of co-operation. Financial times United Nations (2010). World Economic Situation and Prospects 2010. New York: United Nations. 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