Financial Crisis
The aim of the report is to understand the aspects related to the Global financial crisis and the possible causes which contributed enough to the occurrence of the financial crises. Global Financial Crisis refers to the period of stress in the global financial market and banking systems which took place across the world. This report includes the discussion of the causes of the changes due to which the GFC repeat in the near future. Moreover, the paper will also include GFC on the countries and their economies at the time of 2007-2008 crisis. The discussion is not limited to the Great Depression of 1929 but it also includes the Financial Crisis of 2007-08 which led to the rise in the different reforms. Further, it includes the discussion related to the different reforms which were formed by the government after the occurrence of the Global financial crisis for eliminating any such situations in the near future.
There are many events of the financial crisis in the past 40 years which is remarked as the difficult period for the countries. The Great Depression of 1929-39 and Financial Crisis of 2007-08 are the examples of financial crisis events which majorly focused while talking about GFC in the report.
The Great Depression of 1929-39
Great Depression of 1929-39 is considered as the worst financial and economic year for the countries in the 20th century. It was found that numerous people believe that the Great Depression was caused by Wall Street crash of 1929 but actual reason was behind the event was the poor policy of U.S. This period was continuously going till10 years which results in massive loss of income, increasing unemployment rates, and the industries faced the output loss. It has been observed that the unemployment rate of the US is almost 25% at the peak of the crisis in 1933.
The Financial Crisis of 2007-08
Financial Crisis of 2007-08 is still considered as one of the most severe crises after the Great depression of 1929-39. This financial crisis led to the wreaked financial markets across the world. It has been found that Lehman Brothers are one of the major contributors behind the issue as they are considered as one of the leading investment banks in the world. The investment bank is the biggest bank which is evident when it acquired financial institutions and businesses. It takes almost a decade in order to return the things to normal by wiping the millions of jobs and billions of dollars of income along the way (Kler, Leeves, and Shankar, 2015).
The Great Depression of 1929-39
It has been analysed that there are many causes of the financial crisis which needs to stop in order to remove the financial crisis from the world. Some of the possible causes are discussed below:
Banks created too much money
It has been seen that banks provide the loan to people which leads to the generation of money by them. It was found that banks loans generated money doubled by 2007 which was possible by issuing new money on the market. This money leads to the rise in the debt within the economy, which customers and investors were not able to pay. The increasing debt was one of the reasons which cause the period of great depression and financial crisis in the economy (Bénétrix, Lane, and Shambaugh, 2015).
It is observed that lending a large amount of money into the property market increase the prices of the houses. The price rate of houses increases ultimately leads to the rise in prices of personal data. The interest is supposed to be paid on all the loans taken by the people to the banks. The interest charges are higher than the incomes of the people due to which the people were not able to repay their loans (Balakrishnan, Watts, and Zuo, 2016). This shows that the interest rate was high due to which people stopped repaying their loans and banks found themselves in the danger of bankrupts. Bankrupts are the part of the financial crisis which is caused by the higher amount of lending money. The banks were supposed to limits in order to invest in the property market so that the prices of houses are remaining fix and low. The personal debt’s interest was high which leads to the issue for people because they were not capable enough to pay their loans (Berger, Imbierowicz, and Rauch, 2016).
It has been seen that the banks lend the money in the market with the confidence of repaying. The banks set their limits in the terms of lending at the time of badly going economy. The banks reduce the number of new loans which is made by the banks for the people but at this point, people still repay their loans. It can be said that the making loan, generating the money and repaying the loan is destroying the money value in the economy. When the people repay their loans fasters than the banks in making new loans than the period of great depression occurs. It is considered as destroy of money from the economy because the growth of economy slows down and the prices decrease. As a result of the time period, the economy is slipping into the debt deflation where the wages and prices fall but the value of the debt of people remains unchanged. It becomes expensive for the people to survive in the economy in the real terms. In this case, people and businesses who are not involved in this also need to suffer from the loss. The recession is the result of the refusing lending by the bank (Claessens, and Van Horen, 2015).
The Financial Crisis of 2007-08
History is repeated with the bubbles and crashes and teaches a lesson with the different ways. These bubbles and crashes harm the people but teach the lessons to the new generation to stop the mistakes. It has been seen that the GFC will be repeated because the causes of the crisis are raised in the economy very deeply. GFC is raised due to some mistakes which can be repeated again by the banks. In the past financial crisis, the tech is not in the scale of bubble and crashes but now it is on the scale of bubbles and crashes due to e-commerce stock like Facebook, and Amazon (Biggs, Hicks, Cinner, and Hall, 2015). These sites earn the high rate of benefits in the period of inflation and deflation by satisfying the consumers’ needs and wants. People take loans from the banks in order to satisfy their needs and wants which is the reason of GFC (Gilchrist, Schoenle, Sim, and Zakrajšek, 2017).
The high debt does not mean a crisis but increases the interest rate are burdened for the people. In the past crisis, it has been seen that the high-interest rate with the low wage rate causes the financial crisis in the market. But now, inflation is low, monetary policy has been restricted by the government, less investment on technology or housing and the standards of banks have not been relaxed as the same degree as seen the prior to the GFC (Chen, Filardo, He, and Zhu, 2016). It has been seen that banks required more capital fund with the greater proportion of funds from the depositors in order to restrict the monetary policy.
It is estimated that the GFC crisis is happened as per the minor signs of the crisis in the market. It can be said that the crisis will take place with the new causes because the banks are taking care of the past crisis causes (Carson, Fargher, and Zhang, 2017).
Every developed country is affected by the financial crisis such as Australia, China and many others. The different sectors of Australia and China are affected due to the financial crisis. The manufacturing sector of Australia and China were impacted by the global financial crisis in contrasting ways. The manufacturing sector of the Australian has been decline and now it stands at 8.5 per cent as compared to 12.1 percent in 2000. The manufacturing sector of China is increasing with the continuous rate with the annual growth rate of 10 % annually. But after GFC the export market of China declined due to this labour also declined as well as production (Parliament of Australia, 2018).
GFC causes
GFC also affected the trade market of Australia and China, the Australia total merchandise trade decreased with the rate of 11.6 per cent in the year 2009. The export fell by $27.4 billion or 12.2 per cent to 196.9 billion from the record peak in the year 2008 (Reserve Bank of Australia, 2018). The import of Australia fell by $25.5 billion to $203.2 billion. It has been found that the total merchandise trade value is cut by 0.04% off GDP the growth rate of 2.3 per cent. China was also an exporting source of Australia; China exports fell by 17.8 per cent ($35.8 billion) of total imports (Richardson, Taylor, and Lanis, 2015).
GFC encourage the government of different countries to take the steps against the crisis by forming the reforms in order to improve the performances and economies of the countries. There are different methods are used to resolve the crisis such as forming more resilient financial institutions mainly related to the banks, addressing the big problems, addressing the risk in the terms of banks and the form the derivatives market for the safety. Derivation of the market raises the financial market infrastructure. It has been found that the in the year of 2014 the G20 president of Australia supported the banks by focusing the G 20’s efforts. The president of Australia supported the banks so that they can reach the agreement and progressive implementation which is the major reforms. The making financial institutions more resilient, ending too big to fail, making derivatives markets safer and transforming shadow banking are the major reforms which help to resolve this crisis (Positive Money, 2018). All these reforms help to look over the countries and prevent the issues which would not take the place. These issues need to be resolved at a certain level with these reforms in order to control the GFC condition and prevent from the future.
Conclusion
From the above analysis, it has been concluded that the Global Financial Crisis was one of the major events that took place in the financial and banking system. There are different financial crisis events are happening in the economy over the past 40 years. In this report, the Great Depression and Financial Crisis of 2008-08 are discussed. Refuse to lend an economy shrinks, banks created too much money, banks became unpayable are the causes founded behind the financial crisis in this report. It is estimated that the GFC will be repeated in future because of the different reasons. Australia and China have been selected to analyse the impact of GFC on the country’s economy. This has been found that manufacturing exports fell at the heavy rate in both countries after GFC. The governments took the step against these issues in terms of reforms such as making financial institutions more resilient, making derivatives markets safer, ending too big to fail, and transforming shadow banking. Thus, this made the government prepare the new reforms that help them in resolving the causes of the global financial crisis.
References
Balakrishnan, K., Watts, R. and Zuo, L. (2016) The effect of accounting conservatism on corporate investment during the global financial crisis. Journal of Business Finance & Accounting, 43(5-6), pp.513-542.
Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C. (2015) International currency exposures, valuation effects and the global financial crisis. Journal of International Economics, 96, pp.S98-S109.
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