Understanding Financial Crises: Causes And Impacts

The global financial crisis and its impact on the economy

Question:

Write an essay on “Global Financial Crisis”.
 

Global financial crisis is a catastrophe that serves as a nightmare to the economists worldwide. It’s a situation whereby the whole finance system suffers a great breakdown due to the misunderstanding between the parties involved. It’s a situation whereby the involved financial parties assets and liabilities drop swiftly. The institutions suffer a noble panic making the investors jump into other conclusions like clearing out their savings from banks and panic spreads. Wrong expectations from the investors completely break the banks thinking that the value of goods will drop if they keep the association with the financial parties. Since the massive depression in the 1930s, financial crises have been an issue that the economists are always facing and dealing with each and day. It has been a significant influence on industries and investors since its start. Some crises have occurred over the past 40 years which have entirely transformed the economy of the affected countries and regions.  (C. Avery and P. Zemsky (1998)

Latam debt crisis of 1982 was a great hit to the Latin American countries. The victim countries were depending on other foreign countries on finances to fund their development and infrastructure strategies. Theirs insisted on borrowed money lend to the crisis when the countries were unable to pay their debts.  The economy had grown, and the financial institutions readily gave out loans to the victims to a point where the shares had doubled in just some few years.  Mexico was the first country to claim the crisis in 1982. The countries decided to seek help from the IMF and in later years, the Brady bonds were created consistently to decrease the loan levels of the Latin America countries.

Savings and loans crisis began when the US regulators gave out loans at fixed rates. The interest rose, and the loans were difficult to pay due to the use of short-term money.  Thanks to the president’s involvement the crisis was resolved and schemes that resembled the Ponzi schemes were created. Several other crises have developed like the stock market crash which led to the famous day black Monday. The causes of this crash are still debated till now some claiming that technology took the bigger part of influencing the crisis.  Junk Bond crashes a crisis that took place in 1989 which heavily impacted the US economy. Stills its causes are not approved, but some theories claim that the Ohio mattress fiasco and the buyout of the UAL led to the worst deals ever in finance (Crotty, J., 2009). The famous Asia crisis a repetition of the Latin crisis led to Thailand’s currency collapsing and was in a huge debt to foreign countries. The country resolved the crisis after a big funding by the IMF. Dotcom bubble and the carbon copy crisis in Russia is other crisis’s that face the world before the other greatest depression happened in the 2007-2008 era.

The sub-prime mortgage crisis was the largest crisis that hit the nation since the crisis in the 1930s. Triggered by the unexpected decrease in house prices after the homes bubble fell easing to the devaluation of homes securities. These led to mortgage foreclosure and the decline in residential investment. The amounts the businesses would spend on the homes investment gradually reduced and debts increased. Big financial institutions later fell in 2008 leading to a great commotion in the flow of credit between financial parties.

Examples of financial crises that have occurred over the years

The financial crises came into existence due to various reasons caused by financial institutions and the market. Banks were able to provide in a fast way to a lot of money to the people, and this led to skyrocketing of house prices. Bank loans had doubled in just seven years due to a huge amount of money disposed of into the economy. Every time the bank lends it creates new money thus the more times it lent out it created more money and increased the debt levels over time. When the banks had that large amount of money, they fully invested it into other sectors away from the business. The residential and commercial sector was the place the banks ran to when it came to investing. Around 40% of the money spent went to the residential property and commercial real estate’s which pushed up the house prices and wages. (Grant, W. and Wilson, G.K., 2012)

Lending of large amounts of money to the commercial and residential sector pushed up the debt levels. House prices were pushed up to pay the interest rates which had risen faster than the income rates. Some people were unable to pay the loans due to the high-interest rates. Banks were faced with dangers of going bankrupt and collapsing.

Tension by the banks made the crisis grow even stronger. After they had realized the crisis had started the banks decided to limit lending out of money. These led to market prices going down and house prices dropped. Thus, the people who had borrowed a lot of money had to sell off their properties for them to repay the loans. These led to the shrinking of the economy due to the limited lending of money. Thus, fewer investments were made, and the public had to use their income to repay the enormous amount of loans. (Markus Brunnermeier, 2008)

In my opinion, a financial crisis will not occur sometime soon. The impact the financial crisis of 2007 had in the nation and the world, it gave them a great lesson to learn and change. The market has been stable since that crisis, and the government and other financial institutions are working hard to be in control of the market. Its impact on the economy left marks on the economies which serve as a hard lesson learned. If banks keep on lending more money, and the number of borrowers increasing the government will put in some measures to hold on the crisis that might occur. 

Developing countries like Nepal are essential to the world’s economic and financial growth. Their key development strategies and plans have made them have such an impact on the world’s economy. Projects that are undertaken and government policies that are in action have affected the economy in a big way (Crotty, J., 2009). The financial crisis was such a hit to Nepal and other developing countries. Their high dependence on loans for funding their economic developments was affected during the crises. Banks were no longer able to offer funds that would support their projects and the interest rates had scaled up. They had to look for other means which were very few at that time. The financial flows through the world market led to great losses in the developing countries taking others back to poverty. The millennium development goals were profoundly affected as Nepal, and other developing countries didn’t have the resources to push forward the economy. They were unable to protect their citizens from the crisis thus had severe impacts caused by the financial crisis. (Markus Brunnermeier 2008)

Causes of financial crises and their effects on the economy

Years later Nepal and other developing countries have joined up, formed cooperations with one another and are calling up for their participation in the world’s economic affairs.  They have decided to work together and have raised reforms that made them heal after the crisis. They have created strategies to develop their economy and take it to as greater height. Nepal has made up decisions to have a restricted and independent monetary policy that will help them stabilize their economy. This move Nepal is been adapted by other countries to be fully in control of their economy and prevent future effects that may be caused by a crisis.  The governments to ensure that borrowing of money is under control, and the economy is stable use monetary and fiscal policies. 

Countries have attempted to raise work use especially by cutting work charges, putting off practical retirement ages, changing debilitating geniuses and supporting segment work market strategies (Active work market approaches). At the onset of the subsidence, most affiliation money related co-operation headway countries needed to upgrade the security net for occupation washouts by boosting unemployment benefit benevolence and stretching out degree to new get-togethers of workers. Then, more than 70% of affiliation fiscal co-operation progression countries raised resources for occupation hunt down help and get readied endeavors reviewing the finished objective to empower re-business and re-sending. (Grant, W. and Wilson, G.K., 2012)

To bolster work demand, work-sharing blueprints were appeared or stretched out in 70% of affiliation fiscal co-operation change countries, work costs were cut and new business or contracting improvement strategies were shown, as often as could be normal in light of the current situation concentrating on fringe occupation seekers, for case, youth, more masterminded supervisors, or the whole game plan unemployed. Some impermanent assigns were in this way composed, and troublesome work market changes were done in the degrees of retirement arrangements, work security, scarcest wages and wage overseeing structures, especially with respect to the European obligation crisis. (C. Avery and P. Zemsky 1998)

Concerning went for boosting work capacity, countries have been especially changing in redesigning the graph of their change approaches and overhauling their plan systems, while essentially less progress has been competent towards diminishing agrarian procedure fortify and clearing pieces to remote direct wind. The need to go on both higher progress and dependable money related union in various affiliation monetary co-operation headway countries has also given additional motivation to change all around arranged assessment changes that diminishment impediments to work and contribute.

All making economies have completed systems gone for updating the quality and painstaking quality of their game plan structures, which is a key test these countries face to fulfill higher longings for standard solaces. Helped by their all things considered more reasonable monetary circumstances close to their higher change prospects, most huge rising countries continued setting assets into physical structure, another specific Going for Growth need in different them. By separation, less has been done to address other principal suitability redesigning needs, for instance, the diminishment of obstructions to business attempt and remote direct wander and the change of the standard of law and of affiliation structures. Given what has been done starting late, require should be given to advancement that can strengthen occupations concerning decided money related union.

Measures taken to prevent financial crises

At the present point, there is a need to diminish the danger of unemployment consistency in different affiliation financial co-operation headway countries, which can be able through sensible Active work market orchestrates went for retraining cleared authorities and asking return to work.  In such way, there is a case for protecting open spending on such start from cash related hardening tries. Precisely when recovery in labor market premium is solid, Active work market approaches should be joined by unemployment advantage changes with a point of view to overhauling work shines. Change especially composed responsibility changes could strengthen the associations substance of a recovery, while likewise getting the money for related union seeing that they are done in a way that raises charge pay. (C. Avery and P. Zemsky, 1998)

These circuit emptying charge utilizes and moving the obligation gathering rate towards charge bases that are less unsavory to business and movement, for case, unfaltering property, use and ordinary appraisals. Thing showcase changes are an essential for some affiliation financial co-operation progression countries particularly in Europe, and could help transient change, especially if recognized in certain secured pieces, for event, retail trade and expert affiliations where the likelihood to quickly make occupations is to some degree high. By lifting proficiency and potential progress, such changes would relatively affect sly affect obligation stream and money related sustainability– Concerns that developments may consolidate transient financial events before their motivations of premium start to have all the stores of being misrepresented (Blankenburg, S. and Palma, J.G., 2009)

Considering  first the collaborations between the cash related structure and the business and family unit divisions in the impact time of a budgetary cycle. In Graph 1, the dim jolts point in both course. This illustrates, even as the flood of bank credit is using up those divisions, the dealing with a record structure is using itself up amid the time spent creating credit. A couple of parts are pounding endlessly in this stage. 

Graph 1
From the borrower side, more grounded interest and pay and higher asset costs tend to cut the cost of financing. More grounded aggregate premium profits streams and, for associations, it extends the abundance of inside resources, which are less costly than remotely raised resources. Higher asset costs lift the aggregate resources of firms and family units, in this way encouraging their passage to bank acknowledge, similarly as both volume and expense. More rich poor inside resources and more foremost access to outside credit cut down the convincing cost of commitment. This leads firms to place more in structures, capital stock and stock. Family units, in the meantime, are encouraged to spend more on hotel and buyer durables. 

References

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Berkmen, S.P., Gelos, G., Rennhack, R. and Walsh, J.P., 2012. The global financial crisis: Explaining cross-country differences in the output impact. Journal of International Money and Finance, 31(1), pp.42-59.

Blankenburg, S. and Palma, J.G., 2009. Introduction: the global financial crisis. Cambridge Journal of Economics, 33(4), pp.531-538.

Avery and P. Zemsky (1998), ‘ Multidimensional Uncertainty and Herd Behavior in Financial Markets’. “American Economic Review” 88, pp. 724–748.

Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’. Cambridge Journal of Economics, 33(4), pp.563-580.

Fidrmuc, J. and Korhonen, I., 2010. The impact of the global financial crisis on business cycles in Asian emerging economies. Journal of Asian Economics, 21(3), pp.293-303.

Grant, W. and Wilson, G.K., 2012. Consequences of the Global Financial Crisis (p. 287). Oxford University Press.

Griffith-Jones, S. and Ocampo, J.A., 2009. The financial crisis and its impact on developing countries (No. 53). Working Paper, International Policy Centre for Inclusive Growth.

Jackson, J.K., 2010. Financial Crisis: Impact on and Response by the European Union. Diane Publishing.

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Justin Lahart (2007-12-24). “Egg Cracks Differ In Housing, Finance Shells”. Wall Street Journal (WSJ.com). Retrieved 2008-07-13.

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Moshirian, F., 2011. The global financial crisis and the evolution of markets, institutions and regulation. Journal of Banking & Finance, 35(3), pp.502-511.