Causes of the Global Financial Crisis and its Impacts - Assignment Example

? Causes of the Global Financial Crisis and its impacts. The financial world came at the brink of another Global crisis near the end of 2007, which went on to shake the entire world with a crisis, almost equivalent to that of the Great Depression of the 1930s, after the First World War. The impact was intense. There were people had lost their homes and jobs, all stocks within the financial companies had been made worthless, it was the signal of a start over for the lives of many, who had been affected directly or indirectly. This was given several names, the common ones being The Global Financial Crisis or 2008 financial crisis. At present, we still face the effects caused by this financial crisis, and much like the previous Great Depression which became a matter of educational importance for students to analyze; a great amount of thought has been dedicated to understanding the factors that eventually led to this economic breakdown. While analyst like Wendell Cox have distinguished the cause into two broad categories, one being the Profligate lending that led to losses, (Macro-Economics) and the other being the excessive land use regulation exacerbated losses, (Micro-Economics). However, the entire process of the economic meltdown is a series of chain reactions, each policy directly or indirectly leading to the other and causing the system to collapse like a set of dominos. (Report, 2008) If we start at beginning of one of these chains, we find out that the period between 2000 and 2007 saw a marked increase in savings, all of which were available to be invested somewhere. At one point in 2007, the Global Pool of fixed securities increased from $36trillion to $70trillion. (Labonte, 2008) . Investors started searching for new alternatives around the globe where they could apply these savings. This caused a bridge to emerge between these investors and the policy controlling and regulating mechanisms established around the globe. This unauthentication and absence of transparency caused bubble after bubble to be created, each one waiting to burst at any moment. One such target became the housing sector as well, where extensive amount of investments were made and the housing bubble was created, particularly in the US which was soon to meet the expected fate of any economic bubble. To add to this was the fact that mortgage funding was made very easily available for everyone, at low interest rates and with reduction in the standards of regulation previously considered before approving a mortgage loan. This meant that even people who did not previously qualify for these loans (subprime) could now afford the expensive houses. The mortgage broker also extracted his benefit from this process. While he is awarded a fee for every mortgage that he passes, these brokers began to push their guidelines limit and award loans to even those who did not meet the qualification to pay them back. The “prime” borrowers were also able to extract advantage by taking larger loans than they could previously. So when these people were unable to pay back their loans, the mortgage market faced an unaccounted crisis and the series of failure of firms began. (Murphy, n.d.). House prices were skyrocketing, people investing in the housing sector were increasing exponentially, and it was only a matter of time till the bubble burst and this is exactly what happened. The interest rates began to increase, homeowners were unable to pay their mortgage installments, the default on the mortgages grew, and the house prices began to fall. The collapse of the US housing market went on to impact the global financial sectors. The “Credit Crunch” as it is called, was the loss of confidence by the US investors in the value of sub-prime mortgages and this led to a liquidity crisis. (Referencing). A bailout package was needed. The US Federal Bank invested a grand amount of capital into the financial markets. But nothing could help avoid the crash of the stock markets and the banking sector. The government proposed a $700billion rescue plan, but failed to pass it on objections that taxpayer money was being spent to save Wall Street investment bankers. (Davies, 2010) Some believe this wrong move may very well be the reason why the crisis was not saved from spreading its roots so deeply in to the Global finance sector. People moved on to investing into gold, bonds, Euros, leaving the housing and stock market to continue to fall. (Sorkin, 2009) Some other leading factors attributed to the crisis may be summed up as the following: Lack of transparency and accountability in Mortgage Finance In some metropolitan markets, there were various land use restrictions implemented, and this caused the prices of available land to be even higher and led to higher mortgage exposure. Where the regulation was not severe, there was only a modest increase in price. If the regulation had been less strict, and the increase fairly uniform, damages could have been extensively reduced. Lack of regulatory laws to prevent financial institutions from engaging into risky transactions. The shadow banking system The trade deficit of the United States A non banking institution, when starts building a financial position by borrowing short and lending long, there is the risk of liquidity and if the market loses confidence, the very institute could fail. This is what happened with Bear Stearns and other companies. (Jinckling, 2010) The United States was amongst the nations most affected by the financial crisis. Not only was it the start point for it in terms of the housing bubble that burst, but also for its economy indirectly impacts a large portion of the world. Residential investment showed an all time low decline of 32.8%. This decline also impacted the labour sector and unemployment also showed sharp declines, for the workers started getting discouraged and stopped looking for work overall. Generally consumer spending does not contribute to recession, but in this case, the decline in durable goods was seen for people who did not buy houses did not need to spend on housing furniture. The overall GDP declined, the demand for American products waned, export slowed and a deficit was observed. (M Dewatripont, 2010) It became a matter of national interest for the US to protect their economic security. Their international relations, their financial infrastructure, and the proper functioning of the international economy were the key targets the country faced. (Krugman, 2009) For in the face of the crisis that had hit Wall Street had engulfed the country with such deep roots as to shake the very flow of its exports and imports and its revenues. In this respect, the country was also unable to provide economic and humanitarian assistance to other countries in the way it previously provided for rescue packages. The United Kingdom met a much similar fate in terms of its economy. All economic activity in the region reached its all time lowest levels. Investment in housing and business came to crisis points. Unemployment reached all time high levels, increasing from 290,000 to 1.92million by the end of 2008. Job vacancies were at all time lows, redundancy levels increased, manufacturing sector was adversely affected, the economy contracted. The recession in the UK affected different sectors including the oil prices, contraction in bank lending’s and the housing market extensively. The British Government announced a bank rescue package of ?500billion, as an initiation to slow down the recession taking place and promote the sector to come out of the financial crisis. (Alastair Adair, March 2009) Overall, it was these two countries that were most adversely affected by the impact of the financial crisis. They are also the one’s that become the nucleus of the crisis for the currency sector for the value of the dollar and the euro showed considerable depreciation. Also, the trade market was affected extensively. For instance, the US is a large importer from China. Hence as US imports fell, China’s exports fall, an example of integrated economies and how the fallout of one country can adversely affect another. The growth of countries like the USA and UK are dependent on international flow of capital and exchange rate stability. The global financial crisis hence hit these countries very strongly and they are still in the process of recovery. (Sahalia, 2010) One is intrigued by how different the impact of such an elaborate crisis can have on developed countries and developing countries. While developed countries like the USA, UK were undergoing recession, some developing countries were celebrating their economic growth. While in 2008, the Malawian Finance Minister declared his country to be growing by 8% in economy, Nigeria has accounted for an approximate growth of 9% and China, the new leader of the developing nations claims to have improved its economy by 10%. Much of East Asia and Africa has also showed a positive response to the crisis, a picture very different from that of the economic giants USA and UK. This is not to say that they were completely unaffected by it. The stock market was hit by a parasite that affected all markets worldwide. The Russian Stock Market stopped trading twice, while the Indian market showed a similar trend. Since the crucial year of 2008, all stock markets around the world have shown substantial drops. (Haugen, 2011) But the impact was positive in some respects as well. Trade and trade prices have improved significantly for countries like China and India whose export in various natural resources showed an uptrend enabling them to extract higher prices. The transfer of labour to the developed countries showed a decrease and people were available to bring substantial growth in their own countries. (Paulson, 2010). However, this had its downside as well. There was a stark reduction in the remittance that was previously being sent to these developing countries for the reduction in migration contributes to lower remittances per migrant. Another matter of concern for the nations is the equity of investment and the affect the crisis has on foreign direct investment. Commercial lending to banks in developing countries showed a downtrend, something that hindered the process of speedy development for these nations. The cut down in financial aid packages to nations like Argentina, Iceland, and Pakistan all indirectly affected the growth of these countries. (Velde, 2008) The economy of the world is itself a manifestation of the globalization that is happening around us. Each event acts as a trigger that can affect the financial credentials of another nation in ways that many continue to neglect. The Global Financial Crisis of 2008 was a manifestation of this very fact, an eye-opener to all the developed and developing nations around the world. It was triggered in the USA and went on to create a depression as great as that of the 1930’s, one that was analyzed and continues to be a topic many touch upon to understand its causes and how crisis like these can be avoided, or successfully dealt with in the future. Bibliography Alastair Adair, J. B. M. H. G. L. S. M., March 2009. The Global Financial Crisis: Impact on Property Markets in the UK and Ireland, s.l.: s.n. Davies, H., 2010. The financial crisis: who is to blame?. s.l.:s.n. Haugen, D. M., 2011. Reforming Wall Street. s.l.:s.n. Jinckling, M., 2010. Causes of the Financial Crisis, s.l.: s.n. Krugman, P. R., 2009. The return of depression economics and the crisis of 2008. s.l.:s.n. Labonte, M., 2008. Asset Bubbles: Economic Effect and Policy Option for the Federal Reserve. s.l.:s.n. M Dewatripont, J.-C. R. J. T. K. T., 2010. Balancing the banks: global lessons from the financial crisis. s.l.:s.n. Murphy, E. V., n.d. Causes and Policy Implication of Troubled Mortgage Resets in the Subprime and Alt-A Market. s.l.:s.n. Paulson, H. M., 2010. On the brink: inside the race to stop the collapse of the global financial system. s.l.:s.n. Report, H., 2008. State of the Nation's Housing 2008 Report, s.l.: s.n. Sahalia, Y. A., 2010. Market response to policy initiatives during the global financial crisis. s.l.:s.n. Sorkin, A. R., 2009. Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis and themselves.. s.l.:s.n. Velde, D. W. t., 2008. Overseas Development Institute Report, s.l.: s.n. Read More