Global Monetary Crisis

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 encyclopedia." Wikipedia, the free encyclopedia. N.p., n.d. Web. 15 May 2013. <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>.

"Global financial crisis."Khaleej Times - Dubai News, UAE News, Gulf, News, Latest news, Abu Dhabi News, Arab news, Sharjah News, Gulf News, Dubai Business News, UAE Business News, Dubai Sports, Live Dubai Weather, Jobs in Dubai, UAE Classifieds, Gold Rates, Forex, Oman News, Qatar News, Bahrain News, World Muslim Prayer Timings, Dubai Labour News . N.p., n.d. Web. 15 May 2013. <http://www.khaleejtimes.com/kt-letter-display.asp?xfile=/data/letters/2013/Apri

Hooper, Vince. Could the Global Bond Market cause another Global Financial Crisis in 2013? January 5, 2013. Web. May 13, 2013.