Global Financial Crisis

Abstract

Global financial crisis is a worldwide time of economic difficulty that is characterized by economic downturn that is felt in both consumer and industrial market. It is a difficult environment to succeed in since the potential consumers tend to reduce their purchases of goods and services until the economic situation improves. Consumers purchasing power worsen in financial crisis.

This paper analysis the global financial crisis and the major cause that leads to the crisis.

Around the world, financial crisis is felt by the collapsing of large financial institutes, fallen stock bourse, buying out of financial institutes and the bailout programs adopted by even the developed countries to rescue the key fallen institutions in the economy. Global financial crisis affects all people and touches on almost all the key sector such as the banking industry, insurance industry, financial markets sector and the real estate industry.

 Introduction

The collapse of the Lehman brothers in September 2008 (which was the fourth largest investment bank in the US behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) sent fear around the world financial markets. The risk premium on interbank borrowing and corporate bonds rose sharply and made a great deal of damage. Large projects stopped, the corporate sector eventually stopped borrowing, and it was hard to get credit for trading. With falling demand for manufacturing companies like cars and investment goods, trade volumes collapsed. The result was the Global Financial Crisis which turned out to be the largest and worst since World War II. (Havemann, 2015) The global economic growth significantly declined with developing countries economy being mostly affected as export market declined.

 The world was experiencing a dangerous crisis since the Great Depression of 1930s. The crisis began in 2007 when the home prices in the US went down then spread quickly from the US financial sector to the financial market abroad. The entire investing banking industry, the big insurance companies, the enterprises authorized by the government to ease mortgage lending and large commercial banks was made casualties (Havemann, 2015). This crisis affected more than just the financial sector. It also affected the companies that depend on the credit and the American auto industry. The businesses that relied on banks to make loans so that they could keep their cash flow could not do business anymore. Examples of countries that were affected by the end of year 2007 include German, Japan, and China. By the end of the year 2007, economics pundits and analysts recognized that there was a deep recession whose recovery was an uphill task.

This research paper examines the Global Financial Crisis, its causes, effects, evolution and solutions to the crisis. More particularly the paper makes numerous references to the recent 2008 Global Financial Crisis. The 2008 Crisis was fueled by mortgage dealers who made transactions that were not well analyzed and issued mortgage to borrowers with bad terms. From America, this vice spread to Japan, German, China, and eventually to the rest of the world.

Causes of the crisis

Global financial crisis is a worldwide time of economic difficulty that is experienced by markets and consumers. It is a difficult environment to succeed in since the potential consumers tend to reduce their purchases of goods and services until the economic situation improves.

Around the world, it is felt by the collapsing of large financial institutes, fallen stock market, buying out of financial institutes and the rescue packages that governments of even the wealthiest nations have had to come up with to bail the system. Usually, people get concerned that the ones responsible for the problem are the ones that get bailed out and yet the global financial crisis will still affect almost everyone in the world. Families that did not qualify for ordinary home loans got the unfavorable loans from mortgage dealers that carried low interest in the beginning of the year and later grew to double digit rates in the later years. The unfavorable features were easy to miss out for first time home buyers.

Most of them believed that no matter what their income was they could own a house. Dough Larson a writer once said, “People are living longer than before, a phenomenon undoubtedly made necessary by the 30 year mortgage.”  This comment mocked the people that believed they could own homes regardless of their income. Too much foreign money was coming into America especially from china. This provided an availability of easy credit which people borrowed to buy properties that they could not afford. The bankers bundled this loans with hundreds or thousands of others into a mortgage backed security. The security would then be sliced into many other smaller pieces and be sold to investors.  As long as the housing prices kept rising, everybody profited. However, when the housing bubble burst, more and more mortgage holders defaulted on their loans and intern lost their houses and investors all over the world including banks lost their investments

Evolution of the crisis

The 2008 Global Financial Crisis came from the U.S.A although it did not stop in the US. More troubles were experienced in Europe. In December, riots were taking place in Greece and they reflected the anger and the economic stagnation. Iceland went bankrupt and was followed by Hungary and Latvia (Purfield & Rosenberg, 2010). Like it was in US, the financial crisis spread into Europe’s overall economy. Governments in Europe wanted to keep the recession short so they made policies that could assist reduce the effects of the recession in the economy. One of the policies was the interest rate reduction. They also scrambled to approve public spending programs that would help bring money into the economy (Worldbank.org, 2015). Asia’s major economy suffered indirectly. Japan and china’s export industries suffered because of no demand from consumers in the US and Europe, which form a great of Asia export market. 

Effects of crisis

The automotive industry was significantly affected by the Crisis. Car manufacturers were the biggest industry asking for help to recover from the deep recession. These manufacturers were from US, Europe and Asia. The US Senate turned down billions in emergency loans and argued that the car companies got themselves into the mess and it was up to them to get out of it. In Europe some of the car companies announced production cuts (Worldbank.org, 2015). The European government was afraid to help the car industry because they feared others would come asking for help. In china, car sales growth turned negative. They too asked to be bailed out but the government left them hanging. By the end of the year, major economies around the world were in recession or struggling to stay out of one.

The US lost almost two million jobs. Unemployment rates went up and the economic output shrunk. There was doubt that the economy would grow any time soon. No country developing or industrial had escaped the impact of the crisis. No industry was left untouched. The financial Bear Stearns and Lehman Brothers went bankrupt and big mortgage companies like Freddie Mac and Fannie Mae had to be bailed out (Frankel, & Saravelos, 2012). The US government attempted to save industries but did not quit work out because it instead led to an increased budget deficit. Some poor countries suffered from reduced tourism, payments and foreign aid (The Economist, 2013). Consumer confidence remained low. What began as a local problem of excess credit in the US affected every member of the global community.

Response to the crisis

On the bright side, the pressure of the financial crisis looked like it was creating new alliances. Officials from Washington to Beijing coordinated interest rates cuts and fiscal stimulus packages. Officials from China, Japan, and South Korea met and agreed to cooperative response to the crisis. Representatives of the G-20 – a combination of the world’s richest countries and some of the fastest growing- met in Washington to lay the groundwork for global collaboration (Havemann, 2015).

Global solution

To solve the global crisis, Chinese revenues, savings and purchases of the US debt increased. Low interest rates encouraged US consumers to spend and thus causing housing prices to soar. Economists and bankers are working on ways to solve the mortgage crisis. Deflation must be avoided especially if there is no hope for recovery. The government should focus on designing regulations that encourage responsibility after they succeed to gain consumer and investor confidence. Furthermore, policy makers have to recognize the need for global oversight of the banking industry.

Conclusion

In conclusion, Global Financial Crisis began in the US with housing industry. The Crisis caused a lot of industries to crumble. This crisis intern spread worldwide and caused recession and a fall in the economy in many countries worldwide. The nations had to come together and find a solution the crisis. Even though the crisis made a lot of allies, one certainty of this crisis is that there is no localized solution for a problem that extends throughout the world. For the critics of Bush administration, the government failed to regulate the activities of the banking industry. For the Fed critics, the crisis resulted from the economist Alan Greenspan’s policy of keeping the interest rates low for an extended period of time.  There will be several complicated explanations for the crisis. However, the root of the economic recession might lie in one fundamental human instinct; greed.