The Global Financial Crisis (GFC) is the most significant worldwide economic catastrophe since the Great Depression of 1929, sub-prime mortgage crisis is an example of financial crisis that affected global financial market worldwide. Give some other examples of financial crisis in your discussion below.
Discuss the possible causes of the financial crisis. Do you think GFC could be repeated again? Discuss.
Explain the scale and impact of financial crisis in economies of different countries including your own country, identify some of proposed reforms.
In the project Global financial crisis will be reviewed. The causes of global financial crisis will be identified. Impact of financial crisis on different countries will be examined to comprehend the severity of the Global financial crisis. Chances of occurrence of global financial crisis will be discussed. Lastly, proposed reforms for the global financial crisis will be explained.
The financial crisis has become the topic of interest for the general public, academics and policymakers. The huge interest was created in the crisis due to specific features (CiHak, 2009). The features of the global financial crisis were:
Firstly, the crisis was not ordinary considering its geographical reach and scale. The shocks of the financial crisis were great since the crisis of 1929. It has virtually affected the economies of the world (Canstar, 2014). Secondly, the impact of crisis was witnessed in the advanced economies unlike the earlier financial crises which have impacted the emerging and developed countries. The empirical literature has focused on the crisis of emerging and developing countries. The literature related to the impact on developed and advanced countries is scarce. Lastly, the crisis was remarkable in terms of multiplicity and complexity of the contagion channel. The shock waves of financial crisis transmitted instantly from one country to another country, from one institution to another institution, and from one market to another market via channels that have been prominent a few years ago or did not exist. Earlier financial crisis were confined to the single economies only (CiHak, 2009).
The financial crisis began in the year 2007 in the United States. It involved financial institutions of OECD countries. The Global Financial Crisis affected the financial system of the developed countries and the entire economy throughout the world. The impact on the other countries was evidenced when the financial crisis turned into the recession. The indirect effects on the developing countries were reported to be as severe as the direct effects were on the developed countries. After the Second World War, first recession was evidenced. The recession led to the reduction of world gross domestic product in the year 2009. In the year 2009, the GDP growth was reported to be lower by 5.8 percent in comparison to previous year 2007. The downturn was found to be same in the developing as well as in emerging countries. There was drastic fall in the GDP of countries constituting the Central and Eastern Europe (CEE) and Commonwealth of Independent States (CIS). The GDP growth rate in CIS and CEE countries fall by 15.2 percent during the two year i.e. from 2007 to 2009. The figures in sub Sharan Africa and Lain America were 4.8 percent and 7.6 percent respectively. The countries having large current account surpluses or deficit and those having large fiscal deficit before the crisis were suffering chronic output losses in comparison to other countries. It was due to their condition becoming worse after the GFC. Growth rates in Asia plummeted by 4 percentage points during the year 2007 and 2009 (Dullien et al., 2010).
The global financial crisis is supposed to be impacting the low income countries (LIC) specifically in the Sub Sharan Africa. Urgent actions were required to be taken by the international community and LIC policymakers. The crisis was projected to augment the financial needs of the LICs in the year 2009 by at least US $25 billion. 26 LICs were found to be vulnerable due to the unfolding of crisis (CiHak, 2009).
The major cause of global financial crisis that took place in September 2008 was because of the collapse of Lehman Brother. The banks stopped lending to each other virtually. The risk premium on the banks is witnessed to rise sharply to approx. 5 percent. Steps were taken by the authorities to infuse the liquidity in the market, but the damage was already done. The risk premium on the corporate bonds was even more to over 6 percent. Borrowing in the corporate sectors came to an end and large projects were discontinued, demand was falling specifically for the investment goods and for manufacturing products (McKibbin & Stoeckel, 2009).
Major causes of the financial crisis are as follows:
Whenever bank makes loan, the new money is created. Banks have created the massive sum of money by making loans in the markets. This way, banks ended up making more money in the market by loans. The money has increased the levels of debts on the people taking loan within the period of 7 years (ILO, 2011).
Figure 1: Figure showing increasing debt in economy
Source (Positive Money, 2016)
It is evidenced from the figure 1 that money created by the banks has reached to 2213 billion Euros. There is increase in the debt with the increase in money made from loans. The total cash in 2014 was 67 billion euros which is less in comparison to the money created by banks (Positive Money, 2016).
Very small chunk of the trillion pounds went to business which was created during 2000 to 2007. The part of money used outside the financial sector was:
Figure 2: showing use of bank’s money
(Positive Money, 2016)
Practice of lending large sums of money into the property market spurs the prices of house. In addition to that, the increase is evidenced in the level of personal debt. Interest is charged on the amount of loan by the banks. Debts were more than the income of the people and they became unable to pay the debts. At this point, the banks stand at the verge of going to bankruptcy and people stop repaying their loans (IMF, 2009).
These were some of the causes of the global financial crisis. Post the crisis banks became hesitate in lending their money to the households and businesses. The slowdown in the lending caused decrease in the prices of market. It indicated that those who have borrowed much in a bid to speculate on the higher prices will have to sell their assets for repaying the loans. Prices of houses plummeted and bubbles burst. Banks panicked with the scenario and slashed down the lending even further. Banks repay only when they are confident that the amount will be repaid. Since, banks were not sure that the amount will be repaid and so they confined their lending (Alcorta & Nixson, 2011).
The global financial crisis shook the world in 2007. The volatility of the market has been overcome and markets have become relatively stable (The Hindu, 2014). Major economies of the world are reporting positive growth rates in country. The probability of not encountering such a financial global crisis is just 13 percent as per the reports (Rimkus, 2015). The financial crisis can happen again but the structural reforms taken at that time can mitigate the damage. If financial crisis will take place in future again, central banks and government have to take remedial measures (Belvedere, 2015).
The crisis has been able to produce various impacts which are different in nature around the world. There are negative effects which are being reported across developing countries and these countries are victimized by financial crisis. Some of the problems which are noted by the dignitaries of United Nations are as follows:
Moreover, these conditions have raised a situation where basic needs of the public like health and education cannot be properly satisfied. Thus, there has been an increase in the mortality rate for infants and pregnant women. The housing sector has been collapsed and the debt levels of the man living in these countries are more than 150% of the GDP of the country. The situation has been calculated by the United Nations and an estimate of 2.6 percent fall in gross product is about to happen and it will be the first decline of gross product after the Second World War. Further, the crisis would have a great impact on the human development and other developments as well (UN, 2016). The debts have risen and millions of people across the globe are losing their livelihood such as their jobs, homes and income. There has been estimation from the world that nearly 50 million of the world population has lost their job and their livelihood and have been put into extreme poverty. Children and women are the major victims of this condition. The United Nations have figured out that this condition will cause a rise of an unnourished generation which will reach the historic count of nearly a billion. There would be more impact on the developing countries due to the crisis when compared to developed countries. The sad fact is that the countries who are suffering the most of the effect have not contributed to this condition. According to Martin Khor, 6 percent of the national income of a developing nation would be lost and there would be significant fall in the economy of those countries during financial crisis (Europe Commission, 2014).
There are different alternate solutions which are being proposed by the wealthy nations such as the G20, United Nations, and civil society. The conference at the United Nations on June 2009 stated many proposals in which the G20 nations came up with a stimulus package and a proposal. The significance of the initiative taken by the United Nations is that it forced the participation of all the countries of the world in regards to the crisis in economy. The proposals are based upon the economic crisis and the way it is being used for. For example, the transformative proposals denote or address the aspects of structure related to crisis. The short term fixes in the crisis will be called as reformative proposals. The role of proposals is to have a substantial effect on the causes of crisis and it will concentrate on the requirement of a radical transformation in the financial architecture of the world with the help of other countries (EC, 2009).
Conclusion
The aim of the project will be to discuss about the chronicity of global financial crisis. Massive waves have been created by the recent financial crisis in the papers, books and articles. Many documents have been published by the central banks and other financial institutions demonstrating the policy response and turmoil in the world. The main causes identified are lending money by the bank and not getting the repayments.
References
Abreu, M.d.P. et al., 2009. The Effect of the World Financial Crisis on Developing Countries: An Initial Assessment. CIGI.
Alcorta, L. & Nixson, F., 2011. The Global Financial Crisis and the Developing World: Impact on and Implications for the Manufacturing Sector. United Nations Industrial Development Organization.
Belvedere, M.J., 2015. Crisis will happen again, but not like 2008: Geithner. CNBC.
Canstar, 2014. What caused it and how the world responded. Canstar.
CiHak, M., 2009. Financial Crisis. Journal of Economics and Finance, 59(6), pp.502-07.
Dullien, S., Kotte, D.J., Márquez, A. & Priewe, J., 2010. The Global and Financial Economic Crisis of 2008-2009 in developing countries. United Nations.
EC, 2009. Impact of the current economic and financial crisis on potential output. European Commission.
Europe Commission, 2014. Financial crisis: causes, policy esponses, future challenges. Europe Commission.
ILO, 2011. The global crisis Causes, responses and Challenge. International Labour Organization.
IMF, 2009. The Implications of the Global Financial Crisis for Low-Income Countries. International Monetary Fund.
McKibbin, W.J. & Stoeckel, A., 2009. The Global Financial Crisis: Causes and Consequences. Austrailian National University.
Mshana, R.R., 2009. The Current Economic Crisis, its causes, its impact and possible alternatives. WCC.
Positive Money, 2016. Financial Crisis & Recessions. Positive Money.
Rimkus, R., 2015. Are We Headed for Another Global Financial Crisis?. Enterprising Investor.
The Hindu, 2014. Raghuram Rajan warns of another global financial crisis. The Hindu.
UN, 2016. The effect of the financial crisis on the third world. United Nations.
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