Transcript
The Global Financial and Economic Crisis webzworks.com/the-global-financial-and-economic-crisis
Introduction The global financial and the economic crises that started in 2007 in the United States and in mid of 2009 that show it extending over the 19 months and affect the economy and markets highly. Many of the companies were not able to stand under these crises and suffer from huge loss and shut down their business. This financial and economic crises is considered as one of the most terrible economic disasters from the 1929 great depression that affects many economies and industries in the global business market. Each of the nation in the global marketplace had faced different challenges because of these crises. This crisis of the economy was transmitted mainly by the financial and the trade flows forcing million of the people to poverty. The shift in the power and the influences which were highly noticeable before these global financial and economic crises are deepening after this crisis [ CITATION Gur10 \l 3081 ]. This crisis occurred despite the treasury department and Federal Reserve department struggle hard to prevent this crises occurrence. This global financial and economic crisis led to a Great Recession in the economy. Even after many years the economies are not fully recovered from this recession and still face economic recession situation with the lower industrial output and rising unemployment rate because of the failure of the businesses and lowering level of the consumers spending [ CITATION Moh10 \l 3081 ]. This economic recession in the global market is the result of the global financial and economic crises that originated in the US in 2007. This paper explains the causes and the impact of the global financial and economic crisis that started in the U.S. in
1/3
2007 on the global economy and also explains the manner by which the global economy recover from these crises and what kind of fiscal and monetary policies were implemented for handling the global financial and economic crisis of 2007 and what challenges remain for the global economy even after recovery period. Explanation of the causes of the global financial and economic crisis that started in the U.S. in 2007. The global financial and economic crises is a breakdown of the trust that arrived between the banks in the year before the 2008 crises. This crisis was caused by subprime mortgage crises that itself was mainly caused by the unregulated utilization of the derivatives. The market of the housing in the US suffered highly because of this crises because many of the homeowners who took out the sub-prime loans revealed that they were not able to meet the repayment mortgage requirements. As the homes values plummeted the high number of the mortgagors found themselves with the negative equity. Many if the loan defaults occurred that results in the crises and lands become less worthy in the market. The banks face the liquidity crises and obtaining and giving the home loans in the US market become highly difficult as lending of the sub-prime bubble burst. The poor financial system and regulation are one of the major cause of this global financial and economic crises that discourage lending and affect the economy greatly [ CITATION KIm19 \l 3081 ]. Some of the other causes of the financial and the economic crises 2007 are global imbalance, lack of the accountability and transparency in the mortgage finance, securitization, non-bank runs, poor working of rating agencies, shadow of banking system, mark to the market accounting, complexity of getting and lending loans, tail risk, fragmented regulations, black swan theory, short period incentives, no systematic risk regulator, excessive leverage, human frailty, credit default swaps, derivatives of over the counter, finance of the off-balance sheet, government-mandated related to sub-prime lending, financial innovation and the failure of the system of risk management [ CITATION Sha11 \l 3081 ] Consequently, it’s seen that the crises were mainly caused by the deregulation in the industry of finance that permitted the banks for engaging in the trading of the huge funds with derivatives. The banks demand high mortgages for supporting profitable sales. They created the interest only mode of loans that become reasonable to the subprime borrowers. On the other hand, when they the Federal Reserve department raise the interest rates the prices of the housing started falling, and the owners become not able to make the loan payment and suffer from the loss. When the worth of derivatives crumbled the banks stopped their process of lending, and this created the economic and financial crises that led to a great recession [ CITATION Ama \l 3081 ]. The effect of the global financial and economic crisis of 2007 on the global economy During this period of global financial and economic crisis of 2007, the prices of the houses reduced to 31.8 % that affect the people highly and reduce the employment level and the spending power of the consumers. The income level of the people reduces, the factories like diamond mines and the copper mines closed because of the high operational cost. The tourist industry faces high downfall because people spending power reduces. The revenue of the businesses decreases and many of the companies to overcome their losses reduce their operations and also reduce their number of employees that affect the employment and poverty ratio of the nations [ CITATION Moh10 \l 3081 ]. The GDP of the economy is affected by the crises, and its export and import reduce that affect the trade balance of the economy. As in developing countries like Pakistan, unemployment reduces by 6% and GDP growth reduced by 8.8% during the 2007 global crises [ CITATION Haq14 \l 3081 ]. In the global market, the growth from 2008 to 2009 was 3.7% to 3.8% respectively that was before 2007 crises were 4.9%. The inflation of the price in the developed countries was raised by 2.9% in 2008 from 2.1% before crises in 2007. In some countries, it also raised by 3.2% that raise the prices of products, and because of low income and purchasing level, the demand reduces that affect the businesses a lot. In short, this global financial and economic crises disrupt all of the economies and become the main cause of the downturn in the economy not only affect the credit markets negatively but also negatively impact the asset prices [ CITATION Tru09 \l 3081 ]. Ways the global economy recover from the global financial and economic crisis of 2007
2/3
From the end of the year 2009, the variety of indicators revealed that this worst crisis came to an end in many of the countries. The market of the stock recovered from its worst condition and became less volatility that was high at the time of crises. The industrial and trade production shows recovery. In countries like Europe, US, China the manufacturing industries recovery started in 2010. The GDP growth, private consumption, government consumption, unemployment rate and exports in most of the companies improves through redesigning the policy measures, monetary and fiscal policies. The more transparency, lower interest rates, making the lending process easy, reducing the bank size, strong government regulations and restructuring of the policies support the recovery of this global crisis that occurred during a period of 2007-2009 [ CITATION She10 \l 3081 ]. The kind of fiscal and monetary policies implemented for handling the global financial and economic crisis of 2007 The crises have raised the role of the national government in the global economy. Some of the banks and the sectors become able to recover from these crises through nationalization policy. The interest rates reduce and the proper incentive policy is adopted. For fiscal debt issue, the policy of the effective countercyclical implemented. For the monetary policy the government supports many industries that help them to attain growth again that boosts the employment and income level in the economy, and as a result, the GDP growth raises in the economy [ CITATION Jür10 \l 3081 ]. The Act of the American Recovery and Reinvestment was passed by Congress in 2009 of USD 787 billion that temporary stimulus the economic development through cutting approximately USD 288 billion tax and offer benefits to more than USD 150 billion to sectors like education, transportation, and energy. These government expenditures and reduction in business operating costs support the recovery of global crises. The federal fund reduces that lowering the cost and support the companies to expand money on their progress and hiring more employees and able the consumers to spend more. The rise of the government expenditures and reduction of the taxes for encouraging the companies to raise the production and hiring more employees to support the recovery [ CITATION Lib10 \l 3081 ] The challenges that remain for the global economy even after recovery from the global financial and economic crisis of 2007 Some of the challenges that remain for the global economy even after recovery from the global financial and economic crisis of 2007 are low employment rate growth, high cost of business, moderate inflation, low consumer pricing in many developing countries and low GDP growth rate. Read Essay provides a platform for UK students from all over the world to connect with experienced and professional writers. You can benefit from our custom writing solutions like we offer help with economics homework, business assignment help, and many other writing services.
3/3
