Introduction to Global Financial Crisis
The deep economic crises are due to the financial crumple in the USA which brought about the profound instability in the operations of the economy. Further the lack of the rules and the regulations are the ultimate reasons for the financial instability. Such emergency can result into the social distress and political unrest. Throughout the years, the markets of the finance turned out to be considerably complex as because of the introduction of the nee items and the products. The blend of the complex monetary frameworks and various other factors are the major causes of the financial crisis of the year 2008. The worldwide financial crisis is viewed as one of the biggest and most serious falls in activities across the world. The following essay is discussed to explore the different sides of the global financial crisis inclusive of the major events and the possible causes of the same. The impact of the GFC on the different nations is also viewed, following by the brief conclusion (Amadeo, 2018).
What could be the main reason was the issue and the answer to this question lies in the fact that how steeply the prices of the housing were against the prices during the depression. The prie of the houses fell by 31.8% and this itself marks the reason of the great cumbersome. It is huge to take note of, that one of the central point that have made the nation’s emerge as the weal points is money related globalization and mutual factors related to globalisation. These joined with the household dangers and in association with the poor macroeconomic approaches fuelled the monetary trouble in the economies. The list of the major events that created this havoc is presented below (Filardo, Genberg and Hofmann, 2016).
The sub-prime mortgage crisis was one of the central occasions which were a piece of the worldwide financial crisis. The loan costs on house instalments were low at first; the possibility resulted into the event where the huge segment of individuals met all the criteria and requirements for home loans sponsored at the reasonable rates. This created a rise in the housing price. Gradually step by step the interest rates were ascended by controllers and the regulators to dodge inflation, the air pocket burst in 2005-2006. Therefore the lenders of the money shut down or declared the financial insolvency or the employees of the money lenders also laid off from such a situation (Australian Government 2009).
Causes of the Global Financial Crisis
The upwards revisions in the estimated write-downs of the banks was the another possible reason of this heated global financial crisis. The amount the revisions were a roundabout of US$ 500 billion as presented in the months of March and year 2008 and ranged up to 3.5 trillion in October 2009. Notwithstanding the abovementioned, the world exchange volume as controlled by the IMF was expressed to be declined by 12 per cent in the year 2009 (Prieto, Eickmeier and Marcellino, 2016).
Another occasion that was featured was mass accumulation of the foreign exchange reserved and from the countries like China. This was done to keep the turnaround assuming any, in the capital streams. The occasion not just brought about the unsettling influences it also resulted in the imbalance of the alignment of the GFC (Turner, 2017).
Further as the markets pressed down and the instabilities and insecurities faced by the financial institutions there was a drastic fall in the private parts of the economies and these crisis further were mixed up by, or transmitted to the real economy (Miranda-Agrippino and Rey, 2015).
Monetary Integration and the Global Imbalances: One of the significant occasions that prompted the global financial crisis was that the universal capital inflows and the budgetary globalization that literally and drastically expanded before the emergency. While the occasion resulted into the positive ramifications on the basis of investments in capital, flow of money across the borders or cross borders and the diversified portfolio and the various market risks created more vulnerabilities towards these events and therefore there was a dramatic shift in the sentiments of the investors and the shareholders and among the rest of the parts (Reinhart, and Rogoff, 2015). Expanded capital streams eventually resulted in the decrease of the long– term loan fees. This further builds the level of risk for the financial institutions related and expanding the supply of credit items in the countries (Australian Government 2009).
Fiscal Policy: There have been various proofs that global financial crises emerged due to the deficient fiscal. The wasteful fiscal strategies where the rate of the interest was terribly low, and was kept under the US Federal Reserve for a really long time, resulted in the risks taken by the banks at the higher level and the risk are bifurcated as the liquidity as well as the credit risks created an increase in the demand and supply for the mortgages. Ultimately the prices of the houses shoot up on which most of the mortgages were dependent (Gendron and Smith-Lacroix, 2015).
Examples of Global Financial Crisis Events
Factors related to the supervision and regulation: It is noteworthy to understand that controls and measures of supervision are considered as the centralised means direct the risk taking limits of the financial organizations and accordingly are the best in taking care of the global financial crisis. As pointed out by Fiorillo the inflows of the capital nature transactions are the prime factors of the macro economy. It was expressed that the insufficiently structured monetary frameworks were not supervised correctly, which further made the oath for the financial instabilities to enter the core economy of the country. The US development during the 2000s at the same time saw the prominence of the subprime credits, which denoted the low-salary US families as the beneficiaries of these loans and advances (Fiorillo, 2018).
Most of the financial markets is affected by the global financial crises occurred in the United States. The tension at the financial front led to the further distress in the economy of the country. It is fundamental to take note of that since the quarter of the September 2008; the economies faced a specialized retreat. Interbank markets of the similar economies were seriously influenced by the liquidity emergency. This was on the grounds that the banks had turned out to be hesitant to provide loans to one another in case of the counterparty dangers. There was a huge fall of the banks and amongst the major banks that came in the influence of such fall were, for example, Lehman Brothers and the economy of the Europe also faced an upsurge. Thereafter there was a series of events that led to the fell in prices of the assets and the entire sector of the real and estate was also crumbled and hit the markets of the US and Europe (Aalbers, 2016).
The progressive nations like India were also substantially hit by the storm of the GFC in such a manner that all the capital flows were in the reversal and India saw a fall in the domestic stock market and the steepness in the stocks of the foreign investors and the institutions. What’s more to this was the lack of the liquidity in terms of the dollar figure and the pressure on the Indian rupee at the downward level resulted in the negative growth rate of the country in the year 2008 (Lynch, 2018).
Even the Australian economy could not save itself from this global turmoil. The impacts in the Australian economy were set apart by permitting of the development, tumbling off the employment opportunities and the incomes of the corporates were significantly hit. In any case, it is important to make a note of the fact that Australia was on of the four economies that was affected by the GFC but hadn’t fallen down to its lowest of the levels (Borio, Disyatat and Juselius, 2016).
Impact of Global Financial Crisis on Different Economies
Since both the macro as well as the micro economic factors resulted in this global collapse the number of reform were created for the individual areas such as the political, social, technological an legal and these reforms were undertaken by the countries to deal with the collapse in their own manner. The major ideology behind such initiatives was to give the power and strength to the finical system and reduce the exposure of the instability among the finical entities. The major reforms introduced by the government and the organisations are as follows (McMillan, 2018).
There have been various measures that were embraced by the administration offices to address the disappointments caused by the GFC. The progressive G20 summits stamps the endeavour of the measures. To better control the situation the major contribution was by the countries Japan, Europe, and the United States, which set up the hedge funds and the new policies and strategies that ultimately marked the attention of the GFC. The major relaxation was seen when the coordination among the nations were apparent through the formation of the Financial Stability Board (FSB) which unites the institutions of the financial nature among 23 nations, ministers of the finance department and delegates (Balakrishnan Watts, and Zuo, 2016).
The banks and organisations took necessary and the mandatory measures to direct and resolve the unevenness among the financial firms and the companies and the emerging countered associated with the GFC. Amongst the western and the upcoming countries it was advised to ring a balance between their currencies and create more flexibility between the investors but to an extent only. Apart from this the Basel Committee Banking Supervision changes were also introduced by the government to improve the distress caused by the GFC. Also the international banks were not allowed to enter their foot unless and until they have their own capital base in the adequate manner.
To cater the systematic risks occurring in the financial system various rules and legislations were passed by the government and one such legislation was the Dodd-Frank Wall street reform. The name itself suggests that there was no entry of the banking institutions in the proprietary trading and they were not allowed to trade the securities for their personal purposes. Further the reforms also results in the prevention of the policy of retaining the amount of interest against the hedge funds and the private equity funds. Hence these focus on more towards the security of the banks and low intervention in the lending practices and giving full back up to the customers.
Actual or Proposed Reforms After Global Financial Crisis
Christine Lagarde, who is the managing director of the IMF once, said that the financial organisations are still not strong enough to cope up with another global financial crisis. Further it was also founded that the major challenges that were faced by the banks and the other developing nations are now heavily secured by the innovations in the field of the finance and technology. However the government also introduced necessary reforms and the measures to give the backup the possible shocks. In association with this method the banks are required to keep cash in the form of CRR and SLR and are also subsequently banned from dealing in the unfair practices. Thus from the above analysis it can be concluded on the theoretical grounds that the GFC might hit again but on the practical front the chances of the GFC are low (International Monetary Fund 2010).
Conclusion
The talks in the past parts concludes that the global financial crisis turnout to be the biggest turmoil in the history of the United States, and moreover the events caused the major distress to the economy of the country at the higher level. Almost every nation faced the storm due to the interconnection of the banking and the tie ups with each other and the results were so drastic in nature that the economies got plunged, the GDP of the country fell sharply and in addition to this the bankruptcies played a vital role in making the Global Financial Crisis a historic event to remember forever. The good thing that happened was the introduction of the reforms and the increased awareness among the government, banks and the other financial institutions. Also the last segment of the report makes the understanding deeper with regards to the upcoming GFC and its probable chances to it back. With all this analysis it can be concluded that though there are sheer benefits in capital abundance and the association with consumers across the borders yet there is high level of risk attached to it.
References
Aalbers, M.B., 2016. The financialization of home and the mortgage market crisis. In The Financialization of Housing(pp. 40-63). Routledge.
Amadeo, K. (2018) The Causes and Costs of the Worst Crisis Since the Great Depression [online] Available from: https://www.thebalance.com/2008-financial-crisis-3305679 [Accessed on: 18/01/2019].
Australian Government (2009) The Global Financial Crisis and the road to recovery [online] Available from: https://treasury.gov.au/speech/the-global-financial-crisis-and-the-road-to-recovery/ [Accessed on: 18/01/2019].
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.
Borio, C., Disyatat, P. and Juselius, M., 2016. Rethinking potential output: Embedding information about the financial cycle. Oxford Economic Papers, 69(3), pp.655-677.
Filardo, A., Genberg, H. and Hofmann, B., 2016. Monetary analysis and the global financial cycle: an Asian central bank perspective. Journal of Asian Economics, 46, pp.1-16.
Fiorillo, S. (2018) What Was the Subprime Mortgage Crisis and How Did it Happen? [online] Available from: https://www.thestreet.com/personal-finance/mortgages/subprime-mortgage-crisis-14704400 [Accessed on: 18/01/2019].
Gendron, Y. and Smith-Lacroix, J.H., 2015. The global financial crisis: Essay on the possibility of substantive change in the discipline of finance. Critical Perspectives on Accounting, 30, pp.83-101.
International Monetary Fund (2010) What Caused the Global Financial Crisis : Evidenceon the Drivers of Financial Imbalances 1999: 2007. [online] Available from: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/What-Caused-the-Global-Financial-Crisis-Evidenceon-the-Drivers-of-Financial-Imbalances-1999-24370 [Accessed on: 18/01/2019].
Lynch, S. (2018) Ten years on from Lehmans: Could the 2008 crisis happen again? [online] Available from: https://www.irishtimes.com/news/world/us/ten-years-on-from-lehmans-could-the-2008-crisis-happen-again-1.3620641 [Accessed on: 18/01/2019].
McMillan, B. (2018) Could the Great Financial Crisis Happen Again? [online] Available from: https://www.advisorperspectives.com/commentaries/2018/03/14/could-the-great-financial-crisis-happen-again [Accessed on: 18/01/2019].
Miranda-Agrippino, S. and Rey, H., 2015. World asset markets and the global financial cycle (No. w21722). National Bureau of Economic Research.
Prieto, E., Eickmeier, S. and Marcellino, M., 2016. Time Variation in Macro?Financial Linkages. Journal of Applied Econometrics, 31(7), pp.1215-1233.
Reinhart, C.M. and Rogoff, K.S., 2015. Financial and sovereign debt crises: Some lessons learned and those forgotten. Journal of Banking and Financial Economics, (2 (4)), pp.5-17.
Turner, A., 2017. Between debt and the devil: money, credit, and fixing global finance. Princeton University Press.
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