Causes of the Global Financial Crisis (GFC) 2008
Question:
Discuss the possible causes of the financial crisis. Do you think GFC could be repeated again? Explain the scale and impact of GFC in economies of different countries including your own country. Identify some of the actual or proposed reforms which have eventuated.
The Global Financial Crisis (GFC) is a situation that occurred in the year 2008 which started for a reason which cannot be accurately considered as parties to financial crisis in many nations at a time. The contract that is being hold was not being honored on other way it can be put forward as the financial assets they hold are worth much less than as previously thought.
As a result to this situation the banks stopped to advance funds to others and also demanded early payments of loans and other instruments of finance (Baylis, Owens & Smith, 2017). This situation is known as frozen financial market.
Private people who fear about their wealth and they further demanding the financial institutions repay the money to the maximum level. This became the reason for the bank to call in their loan and to liquidate holdings of financial assets further in addition it causes downward pressure on the price of the assets of finance, which affected the balance sheet of the financial institution.
The global financial crisis that occurred in the year 2008 was considered as one of the biggest economic disaster that had taken place since the Great Depression that took place in the year 1929. The crisis took place even with the extreme effort by the Federal Reserve’s and treasury department (Ravenhill, 2017). This crisis affected the US banking system and it leads many banks to collapse. The crisis led to a period of great recession. The prices of the housing have decreased by almost 31.8 percent. Even after two years when the crisis was over the unemployment was high as 9%.
The signs of crisis were first noticed in the year 2006 when the price of houses started falling and the realtors thought it is good sign as the house market will return sustainable position. The realtors did not understand that there were too many people who own a home and there was a huge amount of underlying credit (Bekaert et al. 2014). The Gramma-Rudman Act was considered to be the real cause of the depression
The Gramma Rudman Act, which helps the banks so as to engage in trading of derivatives which will be profitable if it is sold to the investors. The mortgages are been backed by collateral securities. Demand for increased number of mortgages has been formed by the derivatives.
It has been mentioned by the Federal Reserve that there have been mortgage crisis which have hurled the housing. It The Federal was unsure about the fact that the damage which was spreading and this is due to the fact that it did not understand the main causes of the crisis that have occurred until later when it was disclosed (Koo, 2014). There were many financial institutions and hedge funds in around the World which was backed by the securities. These securities included the mutual funds and the corporate funds. The banks have resold the original mortgages the derivatives impossible to price.
Effects of the Global Financial Crisis (GFC) 2008
The pension funds had very risky assets and they thought the all the insurance product which was the credit default swaps have protected them (Seabrooke & Kelton,2017).In those times a insurance company known as AIG had sold the swaps .
Banks panicked and thought the solutions since they had to find ways which made it helpful for them to absorb the losses. This has caused the banks to stop lending. Thus it stopped them from lending and providing worthless mortgages as collateral. This was the result when interbank rate (LIBOR) went on increasing. This was a major cause of the financial crisis during the period in 2008.
In the year 2007, the Federal Reserve helped the banks with liquidity into the system by the way of Term Auction Facility, thus the action taken by the Federal was not enough (Holton,2016) .There was rumors which were circulated that it the banks had a lot of non toxic assets and J.P Morgan had to bail it out.
The situation became worsen in the summer 2008, when the economy thought that the panic was over. The Department of the treasury was instructed to spend $150 this was done in order to subsidize eventually leading to the Fannie Mae and Freddie Mae succession (Malpezzi, 2017).
A new and innovative thing in the funds of the ultra sage money market was created by the crisis on September 19, 2008. This was the place where most of the organizations kept surplus cash which had a possibility of being accrued at day’s end. Therefore a certain amount of interest needs to be shown before the need for it. Banks are able to utilize those funds so as to use it on a short term basis loans. The banks went bankrupt and the business of the economy stood stagnant. (Fratianni & Giri, 2017).The fast responses of the business have helped to keep the money in the money market accounts. The bill was not approved until global stock markets almost collapsed
Out of the legislators many of them said that Fannie and Freddie is responsible for the entire crisis. They thought of privatization of the two agencies, but later on it was shut down and the housing market would collapse. This is due to the reason that it guaranteed most of the mortgages(Lindquist, de Vries & Wanna, 2015). Therefore it can be said that the securitization which involves operations such as the bundling and reselling of loans have been spread much more than just the concept of housing.
The Government have stepped in so as to regulate the economy and thus the Congress have passes a reform so as to safeguard and prevent the banks from taking risks, and thus it allows the Fed so as to reduce the bank size and thus to become very big.
There were many measures followed by the regulators and in between the banks used to get bigger and were trying to get rid of the regulation (Kemp, 2015). The financial crisis in the year 2008 was an example where it was proved that the banks cannot regulate themselves. This could have created another global crisis.
Government Actions and Regulations
The main reasons for the financial crisis were that it has occurred due to the deregulation of the financial industry. The banks have permitted to engage in the hedge funds and trading with the derivatives (McBride, Mahon & Boychuk,2015). More mortgages have been demanded by the Banks in order to support the derivates’ sales. This became responsible for the credit of interest on the loans which could be accepted by the borrowers of a subprime nature (Knights & McCabe, 2015). This is the situation which led to the economic crisis which was responsible for the recession.
Deregulation
The Gramm-Leach-Bliley Act which has repealed the Glass Steagall in 1999, is responsible for helping the banks to invest in the derivatives. The banks needed to change so as to compete with foreign firms, thus the banks invested in securities of low risk so as to protect the customers.
After that the next year, the regulations had exempted credit default swaps and also the derivatives from the regulations. The legislations of a federal nature is responsible for overruling the laws of the state which was initially prohibited in regard of gambling. Specifically trading was exempted by it in the trading of the energy derivatives (Ciro, 2016).
The big banks possessed many resources which were sophisticated in order to prove useful as complicated derivatives. There were complicated economic products which were responsible for making the maximum amount of money. This also was responsible for the buying out of safer but smaller banks. There was a significant failure in these major banks by the year 2008 (Akhtar & Jahromi,2015).
Securitization effect
Firstly the hedge funds were backed by the securities which had collaterized debt and derivatives. In case of mortgage backed security in case of the financial product whose price is dependent on the mortgage values which were considered collateral. Once banks give mortgages, it is sold to hedge funds in the secondary market (Thao, Daly & Ellis, 2013).
The banks have sold the mortgages and thus they made new loans with the money received by them. The reality is that these are risk free for the banks as well as the hedge funds. There had been a risk of default but usually there was not much of worry about the risks as they possessed the insurance which used the credit swaps. (Green, 2013). Gradually it was found that almost all the individuals owned them which included large banks, hedge funds, pension funds and even individual investors.
The derivatives existent in the market possessed a combination of both the real estate and also the insurance. This was extremely profitable as the demand for the derivatives in the banks demand for the mortgages which went on increasing for backing the securities (Bezemer, 2012).
The Fed Raised Rates on Subprime Borrowers
The banks have hit the recession during the year 2001 and it introduced new derivative products. The fed funds rate was lowered by The Federal Reserve Chairman Alan Greenspan to 1.75 percent. The Fed lowered it again in November 2002 to 1.24 percent.
This has lowered the interest rate which was charged on the mortgage. The payments were also very cheaper on the interest which based on short-term Treasury bill yields, which are based on the fed funds rate (Singleton, 2016)
Conclusion
After four years past the global crisis, the economy was still surviving .Some Countries were into the debt distress which went into recession and there were still high unemployment and which was added with fiscal deficit and the burden posed due to the debts. The global crisis was not as severe as that of the great depression but it is taking a long span to recover from the crisis in the near future. There were many strategies adopted to recover from the crisis quickly although lessons have been taken from the great depression and thus it will help the economy to reduce the severity of the global crisis. It will take time for the Countries to formulate policies so as to safeguard the economy from the global recession during the period of financial crisis that will come down the line
References
Akhtar, S., & Jahromi, M. (2015). Impact of the global financial crisis on Islamic and conventional stocks and bonds. Accounting & Finance.
Baylis, J., Owens, P., & Smith, S. (Eds.). (2017). The globalization of world politics: An introduction to international relations. Oxford University Press.
Bekaert, G., Ehrmann, M., Fratzscher, M., & Mehl, A. (2014). The global crisis and equity market contagion. The Journal of Finance, 69(6), 2597-2649.
Bezemer, D. J. (2012). The credit crisis and recession as a paradigm test. Journal of Economic Issues, 45(1), 1-18.
Ciro, T. (2016). The global financial crisis: Triggers, responses and aftermath. Routledge.
Fratianni, M., & Giri, F. (2017). The tale of two great crises. Journal of Economic Dynamics and Control.
Green, D. (2013). Silent revolution: The rise and crisis of market economics in Latin America. NYU Press.
Holton, R. (2016). Some social consequences of the global financial crisis. The Consequences of Global Disasters, 223.
Kemp, P. A. (2015). Private renting after the global financial crisis. Housing Studies, 30(4), 601-620.
Knights, D., & McCabe, D. (2015). ‘Masters of the Universe’: Demystifying leadership in the context of the 2008 global financial crisis. British Journal of Management, 26(2), 197-210.
Koo, R. C. (2014). The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy. John Wiley & Sons.
Lindquist, E. A., de Vries, J., & Wanna, J. (2015). 1. Meeting the challenge of the global financial crisis in OECD nations: fiscal responses and future challenges. The Global Financial Crisis and its Budget Impacts in OECD Nations: Fiscal Responses and Future Challenges, 1.
Malpezzi, S. (2017). Residential real estate in the US financial crisis, the Great Recession, and their aftermath. Taiwan Economic Review, 45(1), 5-56.
McBride, S., Mahon, R., & Boychuk, G. W. (Eds.). (2015). After’08: Social Policy and the Global Financial Crisis. UBC Press.
Ravenhill, J. (Ed.). (2017). Global political economy. Oxford University Press.
Seabrooke, L., & Kelton, M. (2017). Global trade and finance. An Introduction to International Relations, 385.
Singleton, J. (2016). 13. Financial crises and disaster management. Complexity and Crisis in the Financial System: Critical Perspectives on the Evolution of American and British Banking, 306.
Thao, T. P., Daly, K., & Ellis, C. (2013). Transmission of the global financial crisis to the East Asian equity markets. International Journal of Economics and Finance, 5(5), 171.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
