The Global Financial Crisis - Essay Example

?The global financial crisis began proving its adversities by mid 2007. By the end of 2008, a great percentage of the financial s had collapsed leaving the government to devise means of alleviating the situation. This essay shall highlight the causes of the crisis, in relation to Peters (2010) as well as the measures undertaken by the government to change its monetary and fiscal polices so as to cope with the adversity. Firstly, the credit crisis played a significant role in determining the global financial crisis. Kolb (2010), brings out the point that, as at mid 2007, a great number of investors in the USA had lost trust in the value of mortgages as the government had offered loans to too many people that could not manage paying back the debts. In response, liquidity was evident, which resulted to the US disbursing more funds to the financial market. By 2008, the situation worsened, as the stock markets had totally disintegrated. Nanto (2009) argues that the stock markets were extremely unstable. For fear of the worst, the investors did not have any trust in the government and opted to withdraw. This argument concurs with that of Keynes theory that specified that, spending by the government is the major reason behind UK’s crisis. In the case of employment, Keynes (2006) reported that employment rates increase the amount of spending and that wages must be kept constant. Secondly, yet another factor that led to global financial crisis is that, the US government had granted loans to many individuals, even those who could not pay the debts, which put the market at a higher risk of collapsing. Igan et al (2010) uttered that the value of the mortgages dropped with the borrowers being left with losses to count. The banks were faced with a lot of deficits to deal with, forcing them to repossess their assets that were of lesser value. Chacko et al. (2011) attribute excessive lending to the major contributor of the global crisis, as the banks found it tasking to deal with the liquidity issue, and the low lending rates due to misappropriate lending by the banks. Lack of proper regulation measures in terms of lending - unethical behavior, cost the globe financial crisis that could not be solved in a day. It is vital that Fredrick’s thoughts are applied in the case of solving the crisis in UK. In his work, he notes prices must be well monitored so as to avoid inflation in a country. However, his thoughts do not match with those of Friedman (2004) who believes in a free market, devoid of barriers from the government. Thirdly, the collapse of Lehman Brothers on 14th September, 2008, marked a new phase of the financial crisis (Savona, Kirton & Oldani, 2011). Due to their collapse, net capital inflows in the financial market reduced, as well as in the domestic stock markets. Griffiths &Wall (2008) attest to the fact that, the concerned governments, just like business economics states, had to come up with solutions to rescue their financial institutions. The housing and stock markets were in a terrible situation. Furthermore, Doyle (2008) notes that, though the Lehman failure had no direct implication on the domestic financial status, massive changes were experienced in the external market status. Large capital outflows were experienced, external commercial borrowings decreased, and acquiring credits became more difficult. Statler & Shrivastava (2012) revealed that by December 2008, the US reserves recorded losses of an approximate thirty three billion from fifty four billion. On another point of view, Aizenman & Jinjarak (2010) emphasized that UK is one of the countries at its peak in terms of spending on reducing the impacts of the 2008 crisis. The government employed the fiscal policy approaches in an endeavor to handle the crisis, as well as a free floating exchange rate to curb inflation. Maximilian (2009) accentuated that fiscal policies spare the country from a decrease in the demand for domestic goods. The UK government in addition, reduced its expenditures and increased the taxes from seventeen point five percent in 2006 to twenty percent in 2012. This move discouraged private expenditures in the domestic arena; thus, low revenues from the sales taxes. Vincelette & Braga (2010) stress that, implications of the international recession by planning its resources were reduced so as to cover up for all the losses incurred in the private sector by employing the countercyclical fiscal approaches. On the other hand, analysts from the Economist magazine pointed out that, the main rate of V.A.T, and consumption tax, went up from 17.5% to 20% by April 2011. Additionally, the monetary policy applied by the UK government reduced inflation rates in the country by regulating the rates as a whole; thus, maintained stability of the entire system. The Bank of England aimed at ensuring that the currency is stable, and that the inflation rates minimized. Prior to the Lehman crisis, monetary policy measures were of no value to the UK government. The government reduced its interest rates to two percent from four point five percent by the end of 2008. Busch (2009) pointed out that, the government set up a Bank Recapitalization Fund of fifty dollars (50?) that gave capital to building societies and a Credit Guarantee Scheme of two hundred and fifty billion dollars (250?) that provided capital for funding and credit facilities to the public. Moreover, Chancellor George Osborne reported that UK would only survive in the crisis if only the government regulated its spending rates. He recommended that a reduction of the debts would go a great mile in reduction of UK’S deficit of about 156 billion dollars. In this case, it is evident that UK’s problem required immediate measures so as to alleviate the situation. Alternatively, Langohr & Langohr (2008) call to attention the fact that, from Moody’s rating Agency, UK was rated among the worst hit countries with the global crisis in the country, and that chances of the situation getting worse were likely to increase if the government did not undertake stringent measures to alleviate the same. Conclusively, Taylor (2009) pointed to the idea that, the major cause of the global financial crisis is the credit crunch that saw many investors withdraw their investments form the market In response, the UK government had no option but to devise quick measures to curb the situation through emphasis and implementation of the fiscal and monetary policies that aimed at ensuring the rates of inflation are maintained. List of graphs From the graph below, UK’s inflation rate can easily be studied. [UK Office For National Statistics. 2012] References Aizenman, J., & Jinjarak, Y., 2010. The role of fiscal policy in response to the financial crisis. [Online] Available at:  [Accessed 15 Feb. 2012]. BBC News., 2012.How does quantitative easing work?.[Online] Available at: [Accessed 25 Feb. 2012].   Busch, A., 2009. United Kingdom Country Report. In Bertelsmann Stiftung (ed.), Managing the Crisis. A Comparative Assessment of Economic Governance in 14 Economies. Gutersloh: Bertelsmann Stiftung. Chacko, et al., 2011. The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead To Economic Crises. Upper Saddle River: FT Press. Doyle, R., 2008. Lehman Brothers' European Bankruptcy. Financial Times report. Saturday, 8 November 2008. Friedman, M., 2004.The legacy of Milton and Rose Friedman's Free to choose: economic liberalism at the turn of the 21st century: proceedings of a conference sponsored by the Federal Reserve Bank of Dallas, October 2003, Volume 16. Dallas: Federal Reserve Bank of Dallas. Griffiths, S., &Wall, S., 2008. Economics for Business Management. Upper Saddle River, New Jersey: Prentice Hall. Igan, et al., 2010. Lessons and Policy Implications from the Global Financial Crisis, Issues 2010-2044. London: International Monetary Fund. Keynes, J., 2006.The General Theory of Employment, Interest and Money. London: Atlantic Publishers & Dist. Kolb, R., 2010. Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. New York: John Wiley and Sons. Langohr, H., & Langohr, P., 2008. The rating agencies and their credit ratings: what they are, how they work and why they are relevant. New York: John Wiley & Sons. Maximilian J., B. 2009. "The reform of UK financial regulation," Discussion Paper Series 2009_16, Department of Economics, Loughborough University. Nanto, D., 2009. Global Financial Crisis: Foreign and Trade Policy Effects. London: DIANE Publishing. Peters, M., 2010. What the 2008/2009 World Economic Crisis Means for Global Agricultural Trade. London: DIANE Publishing. Savona, P., Kirton, J., & Oldani, C., 2011. Global Financial Crisis: Global Impact and Solutions. New York: Ashgate Publishing, Ltd. Statler, P., & Shrivastava, P., 2012. Learning from the Global Financial Crisis: Creatively, Reliably, and Sustainably. Stanford: Stanford University Press. Taylor, J., 2009. NBER Working Paper 14631 - The Financial Crisis And The Policy Responses: An Empirical Analysis of What Went Wrong, Jan 2009. The Economist magazine., 2010. Britain's emergency budget [Online] Available at: [Accessed: Jun 24th ,2010]  Trading economics., 2012. UK interest rate. [Online] Available at: < www.tradingeconomics.com > [Accessed 17 Feb. 2012].   UK Office For National Statistics 2012., 2012.United Kingdom Inflation Rate. [Online Image] Available at: < http://www.tradingeconomics.com/united-kingdom/inflation-cpi> [Accessed 17 Feb. 2012].   Vincelette, A., & Braga, C., 2010. Sovereign Debt and the Financial Crisis: Will This Time Be Different? London: World Bank Publications. Read More