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FIN200 Introduction To Finance Management

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Question:

The Global Financial Crisis (GFC) is the most significant worldwide economic catastrophe since the Great Depression of 1929. The sub-prime mortgage crisis is an example of the financial crisis that affected global financial markets worldwide. Give some other examples of financial crisis events in your discussion below.  

Discuss the possible causes of the financial crisis. Do you think GFC could be repeated again?

Explain the scale and impact of GFC in economies of different countries including your own country. Identify some of the actual or proposed reforms which have eventuated.
 

Answer:

Introduction

Global Financial Crisis (GFC) is considered the most significant worldwide economic catastrophe since the Great Depression of 1929. The sub-prime mortgage crisis is an example of the financial crisis that created an impact on the global financial markets across the world. The aim of the paper is to discuss the possible causes that lead to the financial crises and the examples crises. Further, it includes the opinion related to the aspect that GFC can be repeated again (Dias, Rodrigues and Craig, 2016). The scale and impact of the GFC in economies of the various countries include home country is discussed with the identification of the actual and proposed reforms which have eventuated.

The global financial crisis (GFC) is referred to as the period of the extreme stress in the markets of the global financial and banking system in between 2007 and early 2009. This has been found that During GFC, a recession in the US housing was a catalyst for a financial crisis that spread to rest of the world with the common linkage in the global financial system (Bénétrix, Lane, and Shambaugh, 2015). During the period, numerous banks across the work faced losses and relied on the support from the government to prevent the bankruptcy. Millions of people lost their jobs as it was considered as the major advanced economies that experienced their deepest recession since the year the 1930s when there was Great Depression.

Possible causes of the financial crisis

The financial crises took place due to the different reasons and some of the possible causes that lead to the financial crisis are discussed below:-

 

Deregulation

The financial crisis was majorly caused by deregulations in the industry of finance in which they permit the banks to get engage in the hedge find trading with derivatives. This made the banks to demand the more mortgages to provide the support to the profitable sale of these derivatives. Further, the banks created the interest-only loans that become affordable for the subprime borrowers. In the year 2004, the Federal Reserve raised fed funds rate similar to the way they just resent the new mortgages interest rates (Amadeo, 2018). This results in the falls in the housing prices because the supply of the product outpaced the demand. Moreover, the values of the derivate crumble that makes the banks to stop lending the money to each other. This leads to the financial crises that led the Great Recession.   

Rise in borrowing by banks and investors

The rise in the borrowing by the banks and investors is one of the causes which led to the global financial crisis. The banks and other investors in the market of US and aboard borrowed huge amounts with the motive to expand their lending and to make the purchase of MBS products. This shows that there was a rise in the leverage which magnifies the potential profit and losses. As a result, this was found that prices of houses in which investors made the investment started falling due to which banks stated facing losses because they had borrowed a large amount (Reserve Bank of Australia, 2018).

Further, the banks and other investors found a rise in the borrowed money for the very short periods which majorly include overnight that contribute effectively in making the purchase of assets that remain unsold quickly. Thus, this is the reason they became increasingly reliant on lenders which majorly include the different banks who can easily contribute in extending the new loans as existing short-term loans were repaid (Claessens and Van Horen, 2015).

GFC could be repeated again

History is replete with different crashes and bubbles due to which it is unavoidable that it will happen again as every generation forgets and must relearn the lessons from the event that took place in past through another bubble that is based on the collective euphoria that is all about the new innovations. Providentially, this has been found that in the post-global financial crises environment seen so far with the absence of the broad-based bubbles on the scale of the US housing (Oliver, 2018). There was a flow in gold with the prices of some of the commodity in the early decade but it did not get that big before the event bursting. The rise in the use of the bitcoin and some other crypto were another example but they carried up before extracting in adequate investors with the meaningful global impact. The boom of social media channels and e-commerce stocks like Facebook and Amazon are considered as the candidates for the next crisis in the global environment.

(Source: Oliver, 2018)

The image given above reflects the major asset bubbles that can work as the reason behind other global financial crises in the coming years. The post-global financial crisis-related pullback shows the rise in the global debt which is high relative to the global GDP which is one of the obvious concerns for the countries. However, the rise in the GDP doesn’t reflect that this is the only reason which leads to another GFC. The ratio of the global debt to GDP is tending up which shows that there is a rise in the debt in developed countries (Oliver, 2018). The post-GFC in public debt and debt interest burdens are less due to the interest rate. Moreover, the other signs which can lead to the crises include the scene for recessions and linked deep bear markets in terms of the shares. Though this reason is not spreading as much now it is expected to be one of the reasons due to which crisis can take place. In addition, the inflations is controlled and low, monetary policy remains easy with this there is no excess spread of the overinvestment in technology, housing and banks has achieved the success in the lending standards after the GFC which will show that GFC will not take place in the future (Lane and Milesi-Ferretti, 2017). Further, the regulations related to the financial banks are tightened in which they maintain the higher capital ratios and get more funds from depositors. GFC crisis risks are more in the developing or emerging markets rather than the developed countries because they are warned from the previous crisis. The analysis shows that another GFC is predictable in future but it will be on different causes than the prior GFC.

 

Scale and impact of GFC in economies of different countries

Global financial crisis (GFC) has scale and impact on different countries’ economies and also on the Australian economy. Australian economy was dealing with the issue of fall in the economy which is evident that manufacturing industry today stands at 8.5% which was 12.1% in the year 2000 (Parliament of Australia, 2018). The impact of GFC on the manufacturing was less severe than the first feared as it created the impact on the global recession was delayed and the sector's long term decline remain to continue. Though, the major factors for this decline were the rise in the value of the Australian dollar commencing in the year 2002 which led to a long-term deterioration in the competitiveness of Australian manufacturing. In addition, the impact of GFC was not limited to the manufacturing as it created the impact on the automotive industry and lead to the high rate of the job losses (Parliament of Australia, 2018). The industry faced the sharp decline in export with the fall in the local demand for the vehicles because the people were not able to spend as they had limited power to spend the amount. This leads to the response of the reforms by the government as they introduced the tax break with the other stimulus measures with the motive to stabilise the local car market.

 


The trade of Australia was affected by the GFC as the Australia total merchandise trade reduced by 11.6% in the year 2009 and experienced the first fall in exports since the year 1964-65. This was found that the company faced the fall in the export by $27.4 billion or 12.2% to $196.9 billion from their record peak in 2008 of $224.3 billion. Further, the import of the company also decreases by $25.5 billion or 11.1 % to $203.2 billion (Pham, 2017). This fall in the trade of the company affected the growth as well as the GDP of the country. Further, this has been found that GFC not only affected the working of Australia but it also created the impact on the china, US and European market and trade economies (Kerlin, et al, 2016). This has been evident that manufacturing accounts for approx. 34 % of China's economy and was exposed to the real with the immediate economic fallout from the GFC and global recession. In addition, the fall experienced in China, the US and European and other manufacturing dramatically.

GFC originated in the developed countries mainly but it also created the impact on the developing countries by bringing the reduction in the foreign investment, trade and remittances which leads to the impact on the economies of the world’s poorest countries. This has been found that by the end of 2010, the developing countries have lost an approx. of US $2.6 trillion in the output. Further, the growth in the real GDP of the developing fell from 8.3% which was witnessed in the year 2008 to 6.1% in the year 2008 with approx. 2.4% in the year 2009. Further, this has been found that Eastern Europe and central Asia has faced the largest drop in the percentage which is followed by the Latin America and Caribbean region. In addition, the IMF suggests that the countries who are majorly dependent on the remittances like Morocco and Tunisia could have lost up to 2% of the GDP as the result of declining flows. Thus, the analysis shows the impact on the economies of the company which directly created an impact on the people of the countries (Olatunji and Weihang, 2017). Further, it took a lot of time to recover from the GFC impact and also require the resources which are must to be spent by the companies.

 

Actual or proposed reforms

GFC has made the government of different countries take the steps by forming the reforms that can help in improving the countries performance and economies. The wide range of the reforms efforts include’ forming more resilient financial institutions (this is mainly related to the banks), addressing the too big to fall problems (this include systemically important financial institutions), addressing the shadow banking risks and the forming the derivatives for the markets safer which include the rise of financial market infrastructures (BBC News, 2018). Further, in the year 2014 G20 president, Australian approach supported by the bank that is to focus the G20's efforts on reaching the agreement and progressive implementation in the major reforms (Reserve Bank of Australia, 2018). All these reforms help the financial system and banking to look over the development of the countries and also to prevent the issues so that it won’t take place. These issues need to be resolved as this is the only way through which the GFC condition can be controlled and prevent for the future.  

In the end, this can be concluded that the Global financial crisis is one the worldwide economic catastrophe since the Great depression of 1929. The paper shows the discussion related to the possible causes that lead to the financial crisis in the global market. This has been found that rise in borrowing by banks and investors and deregulation. Further, the concept of GFC is explained by the fact that it could be repeated again. In addition, the scale and impact of the GFC in Australia as well in the other developing countries are explained. This impact leads to the actual or proposed reforms that are formed by the countries government.

 

References

Amadeo, K. (2018) Causes of the 2008 Global Financial Crisis [Online]. Available from: https://www.thebalance.com/what-caused-2008-global-financial-crisis-3306176 [Accessed on 18th January 2018].

BBC News (2018) Banking reform: What has changed since the crisis? [Online]. Available from: https://www.bbc.com/news/business-20811289 [Accessed on 18th January 2018].

Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C. (2015) International currency exposures, valuation effects and the global financial crisis. Journal of International Economics, 96, pp.S98-S109.

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.

Dias, A., Rodrigues, L.L. and Craig, R. (2016) Global financial crisis and corporate social responsibility disclosure. Social Responsibility Journal, 12(4), pp.654-671.

Kerlin, J., Malinowska-Misi?g, E., Smaga, P., Witkowski, B., Nowak, A.K., Koz?owska, A. and Wi?niewski, P. (2016) European Bank Restructuring During the Global Financial Crisis. Springer.

Lane, M.P.R. and Milesi-Ferretti, M.G.M. (2017) International financial integration in the aftermath of the global financial crisis. International Monetary Fund.

Olatunji, J. and Weihang, H. (2017) The Effect and Policy Analysis of Global Financial Crisis on Nigeria Economy. International Journal of Management Science and Business Administration, 3(4), pp.58-64.

Oliver, S. (2018) Seven lessons from the Global Financial Crisis for investors [Online]. Available from: https://www.ampcapital.com/asia/en/insights-hub/articles/2018/September/lessons-from-the-GFC [Accessed on 18th January 2018].

Parliament of Australia (2018) Australia, China and the Global Financial Crisis [Online]. Available from: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook43p/australiachinagfc [Accessed on 18th January 2018].

Pham, J. (2017) How did the GFC affect developing countries? [Online]. Available from: https://economicstudents.com/2017/05/gfc-affect-developing-countries/ [Accessed on 18th January 2018].

Reserve Bank of Australia (2018) The Regulatory Response to the Global Financial Crisis [Online]. Available from: https://www.rba.gov.au/publications/submissions/financial-sector/financial-system-inquiry-2014-03/regulatory-response-to-the-global-financial-crisis.html [Accessed on 18th January 2018].

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