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Causes and Significance of the Global Financial Crisis

Qesttion:

Discuss About The Effects Of The Economic Crisis On Health?

The objective of this task is to understand and evaluate the significance and causes of the global financial crisis which occurred in the year 200-2008. The crisis badly impacted the economies of many countries worldwide. So, the below mentioned task explains about the GFC and its reforms and impacts worldwide.

The financial crisis which occurred in the year 2007-2008 laid an adverse impact on the state of many nations worldwide. The crisis happened in the year 2007 in the subprime mortgage market of market of US. The market busted because many banks went in liquidation and collapsed. Economist says that it is regarded as one of the biggest issue of all times after the Great Depression of 1930s (Davis 2018).Intake of excessive risks in the market led the outburst of the financial markets due to which all the other market were impacted worldwide. Some of the banks Lehman Brothers etc. tried to take advantage of the market by providing maximum loans to the people for purchase of property due to which the subprime mortgage bubble busted affecting the property market as well. High degree of taking risk, high degree of complexity in the market, lax supervision of governments, aggressive strategies of the banking system etc. activities combined together to magnify the impact of global financial crisis (Dijkstra, Garcilazo, and McCann 2015).

Further the main reason of this financial crisis was the combination of debt mortgage –backed assets with debts. Along with which the housing prices in the property market was rising continuously. The traders in the market were looking forward to expand the bond market due to which they discovered the process of restructuring of US mortgages into bonds and sell them to the investors so as increase the flow of income. Further through such investments the investor aimed to purchase the houses. The investment banks were then buying different mortgages from the issuers, pooling them together and restructuring them (Rey 2015).  Then the banks were selling these securities as a new product in the market naming collateralized debt obligation or CDOs. It is assumed that pooling of such different mortgages in the market reduces the risk on securities due to which the assets become safe and secure from the risk. But this theory worked in the opposite manner in this case as the major mortgages which were being securitized were of very low quality and credit rating agencies did injustice to the quality of these debts resulting to which these mortgages were overly estimated (Nobi, et. al., 2014). Due to which the real estate market reached its peak and there was increase in borrowing at low interest rates as well. All these activities collective promote the initiation of financial crisis in the market. The Community Reinvestment Act initiated a law which boosted the mortgage loan for the low and middle income people. Thus, all these activities collectively were poorly handle d in the market and gave rise of the financial crisis (Levine, Lin, and Xie 2016).

Impact of the GFC on Different Countries

Chinese stock market turbulence: The Chinese stock market crashed with the popping of the market bubble in the year 2015 which ended in the year 2016. The A-shares which were listed on the Shanghai stock exchanges were sold by the traders within a short span of time because of insecurities and aggressive fluctuation in the market. The stock market always shows its way when it is being aggressive used by the companies to obtain profits from it. Under this crash, initially the stock market rose to its peak of all time which helped many people present in the market make profits. But soon after that within 3 weeks the market crashed by 30 per cent which was not expected by any person present in the market (Hong 2016). More than 1400 companies listed on the exchange faced a trading halt because of the negative growth. This action was taken so as to secure position in the market and diminish the effect of crashing of the market. Further in the annual meeting of International Monetary Fund, the organization stated that this issue is a serious issue for the countries worldwide as it can trigger another financial crisis. The Chinese stock market was considered as a highly achieving stock market in the world but it suddenly fell down because the shares which were listed on the exchange with a high value than original. Also the high performing stock did not showed up according to the expectations due to which the peak in the market gradually fell down with a rapid speed due to which the country faced difficulties as major GDP of China was growing because of stock market only.

Russian Financial crisis: The financial crisis in Russia occurred in the years 2014-2017. This crisis was result of the collapse of Russian ruble beginning in the second half of the 2014. Due to decrease in the interest of the investors in the economy of Russia due to which the people started selling their assets. This activity of people resulted in the increment of the Russian Financial Crisis. The economy of the country started falling when the prices of the crude oil fell in the year 2014. Russia being the major exporter of oil and petroleum product worldwide faced decline in price of these product by nearly 50 per cent due to which most of the income which the economy earned from this source started depleting. Also the country faced crisis because the international economic sanctions imposed various on Russia (Mearsheimer 2014).

Analysing the Reforms Undertaken after the GFC

The US Federal Reserve’s low rates of interest showed a deep impact on the market of countries worldwide. The companies forecasted the denomination deb including the debts of Russia as well which was increased from 7.4 percent in 2008 to 117 percent by 2017. Reduction in interest rates of US people again started taking interest in the economy of US due to which the capital of Russia started flowing outward. These activities initially slowed the growth rate of the country and it also devalued many national markets like ruble. Further the sanctions imposed on Russia due to annexation of Crimea and Russian assistance to separatists fighting Ukraine in the War in Donbass adversely depleted the state of the country.

The global financial crisis disturbed the whole working of the economies. Many countries faced difficulty in sustaining the global market. Further some of the causes due to which the financial crisis occurred are discussed below:

High level of keeping private debts in the banking sector: The banks initiated the strategy of manipulating the market by repacking the mortgaged securities and selling them in the market. Due to this activity the crisis occurred as the mortgage was overvalued. In order to gain the markets and remove the lock on the securities the banks increased the level of debts for the people ad backed up it with assets. In response to which the people in the market obtained household properties, this subsequently misbalanced the stock market along with the property market as well (Chang, Stuckler, Yip, and Gunnell 2013).

Lax supervision by government: This factor shall be regarded as one of the biggest causes of the financial crisis. The regulatory bodies of the country ignored the activities which were being implemented in the environment by different sectors of the economy. Thus, due to negligence of the government on the activities initiated by different companies, the financial crisis occurred. The government never investigated the causes and reasons due to which the interest rates of the country depleted and subprime mortgage increased (Bech, Gambacorta, and Kharroubi 2014).

Growth of subprime mortgage: In the year 1989, the financial Institutions Reform Recovery and Enforcement Act increased the enforcement of Community Reinvestment Act. This act abolished the banks ‘redlining’ of poor neighborhoods, after which the regulators started giving ranks to the banks on the basis of their performance in ‘greenlining neighborhoods’(Baker, Bloom, and Davis 2016). Further the loans were secured with mortgage but subsequently after some years the federal banks again started raising the rates of interest. And the people were unable to afford them. Due to which people starting selling off their house and the house rates started decreasing. Further due to fluctuation in the property market, the bubble busted resulting in crisis for the country (Ollivaud, and Turner 2015).

Rising Threat of Future Economic Crisis

The economist says that now the chance of occurrence of global financial crisis has increased overtime. As the world economy has now become more interconnected than ever due to which one threat can poorly affect the state of all the nations. The financial markets are heavily regulated and the capital markets are expanding their scope in all parts of the world including Africa, Asia and Latin America. The banking sector worldwide is facing reduction in the number of players as banks have started eliminating themselves from the market. The MNIT countries (Mexico, Nigeria, Indonesia, and Turkey) are gaining the attention now after the Russia, Brazil (Harvie, C. and Van Hoa 2016). China, India and South Africa have shown disappointing results. Europe and Germany have started maintaining the pace in the market by recovering the markets. Further US is still regarded as one of the most competitive economy. This is the current situation which seems to be smooth, but again the causes due to which the world suffered the crisis are arising again. The government policies are encouraging more and more mortgage and the interest rates have now reduced as well. Also lack of transparency and wrongful intention of different companies to harass the market can lead to initiation of this crisis again in the near future. Thus, the regulatory bodies need to implement strict measures monitor the activities of different companies worldwide (Claessens, and Van Horen 2015).

The impact of GFC on different countries is discussed below:

Australia: The economy of the country faced a surprise after the global financial crisis because the markets started busting in unexpected manner. The banks of the country had adequate profits with them but with the occurrence of this event the reserves depleted within a short span of time. Just like many other countries fall in the prices of property rose, banking sector became unstable and the share market busted abruptly. All the reserves of the country were transferred back to US resulting to which the country faced cash crunch. This activity subsequently increased the deficit balance of the country and unemployment increased in the country (Moradi-Motlagh, and Babacan 2015).

India: Though initially the government officials denied that the crisis has not affected the economy of nation but soon the impact was clearly seen. The stock of the country started falling soon after the crisis as rupees 250,000 were wiped off from the share market in a single day. The Sensex started losing its points and showed negative results. The trade also portrayed deficit balance due to which sources of income reduced and the reserves started getting depleted. The manufacturing sector faced difficulty in managing because the demand of the product drooped in the international markets. Lastly it shall be noted that the value of rupee in the market depreciated by 20 percent against the US dollar due to the crisis (Reddy, Nangia, and Agrawal 2014).

Importance of Proper Regulatory Measures for Prevention of Future Economic Crises

Banking reform BASEL III: As some of the countries were not holding enough capital in order to meet the risk which they were taking due to which mismatch in the interest rates and the bond resulted in loss for the country. So, the Basel reform initiated with an aim to strengthen the regulation, manage the risk on practices initiated in the banking sector and supervise the activities accordingly. The framework maintained standards to withstand with the losses and maintain capital ratio as well. Further reform also maintained liquid cash with the banks in order to meet up the unseen liabilities (Ahmed, Coulibaly, and Zlate 2017).

Crisis management and resolution: The key focus of the too big to fail work agenda was to address the international risks. These crisis management activities were initiated for the SIFIs (Systemically important financial institutions). The framework suggests the building banking market sector in such a way that these institution act according to the rules and always remain under the surveillance of the government. Recovery plan was developed to help in financial market infrastructure (Gourevitch et. al., 2016).

Bail-in: Under this strategy the unsecured and uninsured liabilities of failing institutions were converted in equity so as to recapitalize them. Under this strategy three classes were differentiated like, contractual bail in, bail in via explicit statutory powers and bail in by business transfers (Simou, and Koutsogeorgou 2014).

Conclusion

Thus, in the limelight of above mentioned events the fact that shall be noted is that global financial crisis is the biggest crisis which disturbed the markets of all nations worldwide. The inflation rate, interest rate, property rates etc. other segments were busted due to the occurrence of this event.

References

Ahmed, S., Coulibaly, B. and Zlate, A., 2017. International financial spillovers to emerging market economies: How important are economic fundamentals?. Journal of International Money and Finance.

Baker, S.R., Bloom, N. and Davis, S.J., 2016. Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), pp.1593-1636.

Bech, M.L., Gambacorta, L. and Kharroubi, E., 2014. Monetary policy in a downturn: are financial crises special?. International Finance, 17(1), pp.99-119.

Chang, S. S., Stuckler, D., Yip, P., and Gunnell, D., 2013. Impact of 2008 global economic crisis on suicide: time trend study in 54 countries. Bmj, 347, f5239.

Claessens, S. and Van Horen, N., 2015. The impact of the global financial crisis on banking globalization. IMF Economic Review, 63(4), pp.868-918.

Davis, K., 2018. Regulatory Reform Post the Global Financial Crisis. Viewed on January 13, 2018 from < https://www.apec.org.au/docs/11_con_gfc/regulatory%20reform%20post%20gfc-%20overview%20paper.pdf>

Dijkstra, L., Garcilazo, E. and McCann, P., 2015. The effects of the global financial crisis on European regions and cities. Journal of Economic Geography, 15(5), pp.935-949.

Gourevitch, P., Markovits, A., Ross, G., Bornstein, S. and Allen, C., 2016. Unions and Economic Crisis: Britain, West Germany and Sweden. Routledge.

Harvie, C. and Van Hoa, T., 2016. The causes and impact of the Asian financial crisis. Springer.

Hong, S., 2016. China’s Crash Course: How a Turbulent Year Derailed Reform. Viewed on January 13, 2018 from < https://www.wsj.com/articles/crash-course-how-chinas-turbulent-year-derailed-reform-1451714582>

Levine, R., Lin, C. and Xie, W., 2016. Spare tire? Stock markets, banking crises, and economic recoveries. Journal of Financial Economics, 120(1), pp.81-101.

Mearsheimer, J.J., 2014. Why the Ukraine crisis is the West's fault: the liberal delusions that provoked Putin. Foreign Aff., 93, p.77.

Moradi-Motlagh, A. and Babacan, A., 2015. The impact of the global financial crisis on the efficiency of Australian banks. Economic Modelling, 46, pp.397-406.

Nobi, A., Maeng, S.E., Ha, G.G. and Lee, J.W., 2014. Effects of global financial crisis on network structure in a local stock market. Physica A: Statistical Mechanics and its Applications, 407, pp.135-143.

Ollivaud, P. and Turner, D., 2015. The effect of the global financial crisis on OECD potential output. OECD Journal: Economic Studies, 2014(1), pp.41-60.

Reddy, K.S., Nangia, V.K. and Agrawal, R., 2014. The 2007–2008 global financial crisis, and cross-border mergers and acquisitions: A 26-nation exploratory study. Global Journal of Emerging Market Economies, 6(3), pp.257-281.

Rey, H., 2015. Dilemma not trilemma: the global financial cycle and monetary policy independence (No. w21162). National Bureau of Economic Research.

Simou, E. and Koutsogeorgou, E., 2014. Effects of the economic crisis on health and healthcare in Greece in the literature from 2009 to 2013: a systematic review. Health policy, 115(2), pp.111-119.

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