Many
of the world’s countries are still struggling to emerge out of the recent 2008
global financial crisis. This crisis seeped into every economy because of the
interconnectivity that arises out of globalization. The global financial crisis
was close to an economic catastrophe because it not only affected the banks but
also other parts of the economy such as employment. Even though the financial
crisis had its peak in 2008, economists estimate the crisis to have begun in
2002 .( Beams, Nick)
The
beginning of the financial crisis is considerably attributable to the
happenings in the banking sector of the USA. This occurred in five stages. Stage one of the
global financial crisis might have commenced in the January of 2007 when
banking institutions testified to an acute surge in losses, which were
attributable to mortgage defaults. In October 2007, house prices rapidly fell
thereby creating massive losses in countries such as the UK .This made major banks,
which were trapped in real estate-related risks, to start leveraging at
critical levels. In the stage 2, which commenced on the January of 2008, the
global banking credit enlarged by over 175 points.( 2008, September).
This factor led to the complete closure of the asset securitirization markets.
In
2008, the US financial regulators stepped in to rescue Bear Sterns from
collapsing. This was due to funding difficulties that sprang from the destroyed
global debt markets. At this time, the crisis had spread through thee entire
capital market leading to the US government bailout of major financial
institutions.
Financial players packaged the usually secure
mortgages with risky mortgages, as bundles for sale to banks and corporate
investors. In the packages, the real risks were concealed thereby creating an
illusion of value. This element grew as the lending criterion loosened to
accommodate more risky packages in a period of between five to six years. In
close relation to this concept, there was the widespread trade of mortgages
across the world, among individuals who would have never afforded repayments. As
individuals defaulted on mortgages, property prices fell as more borrowers
realized their real financial situations. Many individuals blamed the governments
for not regulating the financial markets effectively, as it would have led to
credible verification of the value of mortgages.
The
housing bubble thrived on low interest rates and considerable wealth that arose
from increased consumers’ savings. In the end, the required compensation of
mortgages outweighed the consumers’ income. As consumers defaulted on their
payments, household wealth reduced thereby cutting back on consumer
expenditure. This is a signal of low demand that contributed to low economic
growth. This relates to the banking institutions, which also faced a low demand
of loans and other financial products.
As
companies cut back on their investments and became bankrupt, it raised the rate
of unemployment. This is because these companies had to lay off workers they
could not sustain through their limited and uncertain revenues.
The
possible solution towards this crisis concerns restoring confidence in the financial
sector. Restoration of confidence is an intense process that governments carry
out to prop up the banking sector. To begin with, the concerned parties should
recapitalize the financial intermediaries. This occurs through either merger
and acquisition plans or direct capital injections. Moreover, governments’
global coordination programs help towards censuring cross- border contagion. By
restoring the confidence, the financial institutions will make efforts to
stabilize their short-term lending.
In
addition, the central banks need to effect low interest rates. This is a policy
of stimulating investment since loans become cheaper. In turn, it also
eliminates multiplier defaulting by borrowers. As investment increases, it
helps towards economic growth that spurs demand for products in the economy.
The administrative procedures suffocate banks from making independent decisions.
These procedures entail aspects such as floor caps, ceiling and reserve
requirement ratio. Short-term fiscal stimulus entails tax holidays and direct
funding to SME’s that improves employment. This strategy, however, should face
limitations as deregulation also contributed to the financial crisis. The
governments should enhance their regulations for proper verification of financial
assets.
Quantitative
easing is government monetary policy infrequently
used to boost the money supply by buying government securities or other
securities from the market. it increases the money supply by flooding financial
institutions with capital, in an effort to increased lending and liquidity.( free encyclopedia)
Economic
policies should be cautious in introducing expenditure options that spur debt
levels. In the short term, however, governments may face the compulsion of
spurring investments through direct funding. This suggests that responsible
financial authorities should implement regulations that govern financial
markets’ operations in terms of lending and borrowing.
Works
Cited
Crotty,
James. Structural causes of the global financial crisis: a critical assessment
of the ‘new financial architecture’. Cambridge Journal of Economics 33 (2009): 563–580.
Web. September 8th, 2013.
2008,
September. "Financial crisis of 2007–08 - Wikipedia, the free
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<http://en.wikipedia.org/wiki
Canstar
research. Global financial crisis; what caused it and how the world responded.
November 23, 2012. Web. May 13, 2013.
Beams,
Nick. "Global Financial Crisis: Tensions at G-20, IMF Meetings. No
Economic Recovery in Sight | Global Research." Global Research. N.p., n.d. Web. 15 May 2013.
<http://www.globalresearch.ca/global-financial-crisis-tensions-at-g-20-imf-neetings-no-economic-recovery-in-sight/5332437>.
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