Global financial crisis: an overview
A sound personal finance is characterized by the ability of the individuals of making informed financial decisions leading to efficient allocation of financial resources as well as overall financial stability at macro and micro levels of an economy. The 2008 global financial crisis is rightly regarded as one of the drastic financial events in the global economy as characterized by mounting losses for individuals as well as big businesses. One of the aspects of the said financial crisis is sub prime mortgages as engaged into by the high risk consumers. This leads to a question on the financial policies of the countries as well as financial literacy of the citizens who engaged heavily in such loan practices. The following report has been prepared with an aim to explore the different aspects of the global financial crisis, in relation to personal finance practices. In addition an assessment shall be made of the policies and regulations enacted post the financial crisis in order to improve the consumer behaviour as well as the overall interest of the stakeholders. The work will end with an overall conclusion of the key points observed.
It is imperative to note that the global financial crisis had initially originated in the United States and later on had engulfed a range of developed as well as developing economies. Thus, the financial literacy and policy of both UK as well as US is worth noting here. The following are listed the factors that contributed towards the occurrence of the global financial crisis. The central bank of the United States that is the Federal Reserve had made an anticipation of mild recession to be originating in the year 2001. In the response the central bank reduced the federal funds rate from 6.5 percent to 1.75 percent in between the period May 2000 and December 2001 (Mishkin, 2011). As a result the banks could extend more consumer credit at lower prime rates. In addition, such a reduction encouraged the banks to make lending to even to “subprime,” or high-risk, customers. Such a cheap credit opportunity was made use by the consumers towards the purchase of real estate which further resulted in the creation of a “housing bubble”. While these loans were sold on the Wall Street, there was an emergence of secondary market for origination and distribution of sub prime loans. As the bubble had burst in the year 2008, the economy of US was in a full blown recession owing to the liquidity struggles of the banks as well as the investors.
The second key contributing factor that led to the crisis was in form of the changes in the banking laws which led to more offerings to subprime customers as characterised by the balloon payments. This means the initial instalments were low as compared to the unusually large payments at end of a loan period. Till the event of rising home prices, subprime borrowers could protect themselves by later large instalments of loan by refinancing, or selling the homes at a profit, or borrowing against the increased value of their homes (Shiller, 2012). It is imperative to note that the subprime mortgages formed for around 15% of the total home loans in 2004–07, as compared to the 2.5% in the late 1990s. Thus, the balance sheet of the banks included a large amount of sub prime loans.
Evaluation of impacts of global financial crisis on the financial literacy
The next key factor that led to the financial crisis was the widely prevalent practice of of securitization. In this practice, hundreds of subprime mortgages were bundled together in addition to the other less risky forms of consumer debts and such securities were sold in the capital markets in form of bonds. The securities included the hedge funds and pension funds as well. Thus, this practice was regarded as an efficient way of enhancing the liquidity and reduction of the exposure of the banks to risky loans, and for other banks and investors, it was regarded as a means of diversification of the portfolios and earn money.
The following are listed global implications of the global financial crisis of 2008. It is imperative to note that there was a drastic drop in the economic growth in emerging and developing economies to 6.1% in 2008, as compared to from 13.8% in 2007 and it further fell to 2.1% in 2009 (Massa, 2012). The following is presented a graphical representation of the fall of GDP of the UK economy owing to the recession.
It is imperative to note that after expansion for 63 quarters in a row, the UK economy had shrunk for 5 quarters in a row owing to the global financial crisis. The said shrinkage was more than 6% between the period of first quarter of 2008 and the second quarter of 2009. In addition it is to be noted that it had taken five years for the UK economy to get back to the size as it was before the recession. In addition to the fall in GDP, there was impact on the employment levels of the citizens of the country as well, owing to the presence of wide multinational companies. Owing to the shrinking of the UK economy, employers stopped hiring and lots of people lost their jobs as well. It is imperative to note that the quarterly unemployment rate had reached its highest levels since the year 1995, standing at 8.4%. An approximate number of people looking for work by the end of the year 2011, were around 2.7 million. The effects of the unemployment had subsided down to return to the pre-downturn rate by the end of the year 2015. The following is presented a snapshot of the unemployment rate of individuals of age group of 16 years and above from 2008 to 2017.
In addition to the fall in GDP and the unemployment rates, the next impact was on the earnings. It is to be noted that have prices had increased more than the earnings for most of the decade since the global financial crisis. It is to be noted in relation to the public sector that the acts of pay cap (from 2013) and pay freeze (from 2011) led to the rise of the wages below inflation. The growth rate of wages was also slow in the private sector. The yet another factor that sheds light on the financial literacy is in form of the productivity levels. These are in form of how much money is added by each worker to the economy. This is measured in output per hour terms. In relation to UK it is to be noted that there has been a steady rise in the productivity levels in the period before the recession. However, such a rate had slumped in the year 2008 and there has been no recovery since. It is crucial to note that if the pre 2008 trends had continued, the overall productivity would be 20% more than what was in the year 2017. The following is presented the graphical presentation of the fall in the productivity
Measures for improvement of financial literacy
Thus, on the study of the different aspects of the financial literacy, it can be stated that the overall financial literacy was quite low in UK during the global financial crisis which led to the loss of GDP, increase in the unemployment rates as well as fall in the productivity of the population at large.
The following are presented some of the measures undertaken by the varied entities including the government for improving the financial literacy in the country post the global financial crisis. There has been a major reform in the manner of regulation of the financial system of the country. One of the measures undertaken by the government is in form of the establishment of the Financial Policy Committee (FPC). The entity has been entrusted with the prime responsibility for identification, monitor and mitigation of the risks to financial stability. In relation to the private entities, it is to be noted that the banks in UK have continued to build up capital resources which is higher than doubling their risk-weighted capital ratios. For the protection of the rights of the individuals, the Financial Services (Banking Reform) Act was passed in the year 2013. This act calls for separation of the core retail banking services from the large balance sheets that support investment banking activities. In addition, there has been higher weight age on the corporate governance aspect of the functioning of the private sector banks and financial institutions.
Conclusions
The studies conducted in the previous parts lead to the conclusions that global financial crisis is rightly been regarded as most drastic financial events in the globe including UK. The crisis which had originally emerged in US had engulfed the economy of UK as well and led to the far reaching impacts. There have been studied a range of factors that contributed towards the global financial crisis such as rising housing prices, increase in the sub prime mortgages, interdependencies of global economies, presence of less stringent regulations leading to rise in the debt securitization practices and others. In addition, the varied aspects of financial literacy in relation to UK have been studied that are GDP, unemployment rates, productivity levels. It has been studied that the overall financial literacy levels were low that affected the personal finance of the citizens of UK. In addition, the later part of the report sheds light on the measures taken by the public and private sector players to improve the financial literacy for the protection of the rights and interests of investors and other stakeholders, such as stringent capital resource requirements, separation of banking operations and rise in the corporate governance requirements for banks.
References
Massa, I. (2012) The impact of the global financial crisis: What does this tell us about state capacity and political incentives to respond to shocks and manage risks? [online] Available from: https://assets.publishing.service.gov.uk/media/57a08a80e5274a31e000062e/60895-part1_crisis_lit_review-effects_of_GFC.pdf [Accessed on: 18 April 2022].
Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives, 25(1), 49-70.
Office of National Statistics (2018a) The 2008 recession 10 years on [online] Available from: https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/the2008recession10yearson/2018-04-30 [Accessed on: 18 April 2022].
Office of National Statistics (2018b) Labour productivity, UK: July to September 2017 [online] Available from: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/julytoseptember2017 [Accessed on: 18 April 2022].
PBS. (2009). Frontline: Inside the meltdown. Retrieved from https://www.pbs.org/wgbh/pages/frontline/meltdown/view/
Shiller, R. J. (2012). The subprime solution: how today’s global financial crisis happened, and what to do about it. US: Princeton University Press.
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