Global Financial Crisis: Causes, Impacts and Reforms

This article discusses the causes, impacts and reforms of global financial crises. It covers the Great Depression, Great Recession, Credit Crisis 1772, OPEC Oil Price Shock, Asian Crisis, Australia & GFC and necessary reforms. The article emphasizes the need for effective government intervention in financial decisions.

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Running head: GLOBAL FINANCIAL CRISIS
GLOBAL FINANCIAL CRISIS
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Great Depression.............................................................................................................................2
Great Recession...............................................................................................................................3
The Credit Crisis 1772.....................................................................................................................5
The OPEC Oil Price Shock..............................................................................................................5
The Asian Crisis..............................................................................................................................6
Australia & GFC..............................................................................................................................7
Reforms............................................................................................................................................7
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

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Introduction
The collapse of the market of United stated of America was termed as sub-prime
mortgage crisis which is one of the example of one of the global financial crisis. The great
depression of 1929-1939 is also a reorientation of a form of financial crisis that wreaked havoc
throughout the world. Financial crises are found to be quite common in history as they have
taken place in the history of mankind due to their misappropriation in the economic activities in
simple terms. Financial crises brought forward socio-economic tsunamis that had affected
various countries significantly (Balakrishnan, Watts and Zuo. 2016).
Great Depression
By the year 1929, over nine thousand banks failed to operate successfully due to the
sudden stock market crash. It is considered that the stock market crash is the major reason for the
great depression though there are many other parametric factors that led to the phenomenon of
Great Depression. This are the Roaring 20s, dust bowl, Smoot – Hawley Tariff Act, etc. All this
things together caused serious weaknesses within the economy for which the “Black Tuesday” of
29th October, 1929 took place (Bénétrix, Lane and Shambaugh. 2015). Nearby 16 million shares
of stock were sold rapidly due to the panicking investor’s decisions to pull their money back
from the stock market due to their loss of faith over the performance of the American economy.
This also led to the global economic collapse for which by 1933 over half of the banks of
America became insolvent. Unemployment reached up to 15 million which was nearby 30 % of
the total workforce. The commencement of such underperformance was began when a bank from
Nashville, Tennessee instigated the occurrence of similar incidence throughout the Southeast. It
was been found that a large number of depositors lost their confidence upon the security of the
bank and for that reason they withdrew their funds from the banks at once (Bremus and

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Fratzscher. 2015). Similar incidence in different bank also took place simultaneously. Banks in
general keep small amount of deposits in the form of cash with them in hand. However, there
was requirement for maintaining a level of cash in order to meet the withdrawal demand of the
depositors. As the share prices fall and the bank have to sell their assets at low prices, hence
these led the banks to become insolvent quickly. The bank panic started as within a point of time
multiple banks ran under the same situation eventually. In the time of the roaring 20s, it was
been found that the economy has boost with the objective of infrastructural development and
building towns from villages followed by urbanization (Brunn et al. 2016). The farmers were
found to possess less amount of hard money to spend in the towns as the banks began to fail as
an alarming rates. On an average nearby 70 banks were failing annually. In the Roaring 20s,
banks provided sufficient amount of credits which led to excess expansion in the economy due to
over-extension of the banks causing a natural disequilibrium within the money market leading to
a boom followed by a bust. People withdrew money from the bank due to their fear that banks
may go bankrupt in the near future. Nearby, $ 140 billion disappeared due to bank failures and
depositor’s trust upon the performance of the banks were affected significantly (Carson, Fargher
and Zhang. 2017). All of this destabilized the economy leading to the incident of Great
Depression.
Great Recession
The great recession is regarded as the sub-prime mortgage crisis that started from the end
of 2006 in the market of the United States of America and invigorated a full grown international
banking crisis leading to the collapse of the investments banks like Lehman brothers by
September 15, 2008. This crisis was followed by the global economic downturn that took place
due to the reason that the banks sold too many of their mortgages to inject demand in the market

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for the mortgage – backed securities which were found to get sold through the secondary market.
It was being found that the home prices fell by the year 2006 for which it triggered defaults and
risk spread in the segments of mutual funds, banks, insurance companies as well as other
segments of the financial corporations that use to own the derivatives (Claessens and Van Horen.
2015). The mortgage-backed securities were created by the hedge funds and the banks. The
insurance companies covered these mortgage-backed securities with the credit default swaps.
However, the scenario become so worse that the demand for the mortgages led to the creation of
the asset bubbles in the housing industry (Ryder. 2016). The derivatives drove the subprime
crisis for which the banks inclusive of the hedge funds also made huge amount of funds through
the selling of mortgage-backed securities. As a consequence, this created an enormous demand
for the mortgages that were underlying. Due to this reason the mortgage lenders continued
lowering of the rates as well as standards for the new borrowers (Rey. 2015). This financial
deregulation was the primary cause behind the financial crisis that permitted the banks to engage
in the trading of hedge funds in exchange of the derivatives. For which the banks demanded
more amount of mortgages for supporting the profitable sales of those derivatives. Countries like
Denmark, United Kingdom, Venezuela, Mexico, Ireland, Iceland, Spain, etc. were affected due
to this financial crisis apart from United States of America (Dijkstra, Garcilazo and McCann.
2015). USA was affected the most as the housing bubbles first occurred in the country as a result
the banking system faltered followed by housing market crash and the unemployment increased
with a rise in inflationary pressure over the economy.
Apart from the great depression of 1929-39 and the recession of 2007-08, there are
various other financial crises that took place overtime and thus can be incorporated as follows:

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The Credit Crisis 1772
The crisis have its origin from London in the mid-1760s after which it spread throughout
entire Europe. The British Empire was overwhelmed with huge amount of wealth due to their
colonial possessions and global trade. This led to over-optimism through a period of rapid credit
expansion by many of the British banks. However, this hype went to an abrupt ending by June 8,
1772 when it was found that Alexander Fordyce who was one of the partners of the British
banking institution fled to France in order to escape the debt repayments (Lane and Milesi-
Ferretti, 2017). This news was found to spread quickly throughout the United Kingdom followed
by triggering a banking panic. Creditors were found to form long lines before the British banks
in order to demand their cash and deposits back to them from the banks. The withdrawals ensued
crisis that quickly spread through Scotland, Netherlands, and British-American colonies as well
as in the other parts of Europe. The economic repercussions of this crisis majorly contributed to
the American Revolution and the Boston Tea party protests.
The OPEC Oil Price Shock
The organization of the Petroleum Exporting Countries (OPEC) and its member
countries that majorly was consisting of the Arab nations took the decision of retaliating against
the United States and its allies. It decided to do so USA’s response of sending arm supplies to
Israel in the period of the fourth Arab-Israeli Warfare. The OPEC countries declared an oil
embargo by abruptly halting exports of oil to the United States as well as its allies (Lennartz,
Arundel and Ronald. 2016). This caused substantial oil shortages followed by spiking the oil
prices leading to financial crisis in the economy of United States and other developed countries.
The uniqueness of this ensuing crisis was simultaneous presence of very high inflation as well as
stagnation in the economy. Inflation triggered due to rise in the energy prices and economic

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stagnation was due to the economic crisis. Thus the situation was regarded as stagflation which is
the simultaneous presence of inflation and stagnation together within the economy and undertook
several years for the inflation to fall within the pre-crisis levels and the output to get recovered
followed by balancing the economic disequilibrium.
The Asian Crisis
This crisis was originated in Thailand by 1997 after which it rapidly spread through the
rest of Eastern Asia and its allied trade partners. There was presence of speculative flows of
capital from the developed countries to that of the East Asian countries like Indonesia, Thailand,
Malaysia, South Korea, Hong Kong and Singapore which are often called as the “Asian Tigers”.
This aroused an era of optimism resulting in an era of optimism through the excessive extension
of credits (Li et al. 2016). This accumulated too much of debt within a short span of time
resulting in the economies to lack in foreign currency resources. Finally, by July, 1997 the
government of Thailand have to abandon their fixed exchange rates against the U.S. dollars. This
created a wave of unnecessary panic for economic slowdown and substantial underperformance
of the products and services that are being produced in the South and East Asian counties in the
global markets. The panic spread through the financial markets of Asia that was involved in trade
with this countries followed by an overspread reversal of billion dollars of foreign investment.
Unfurling of this panic forced the investors to fear for the possible bankruptcy in those countries
followed by impacting the financial market and injecting an economic meltdown (Mensi et al.
2016). Reviving of the market condition took years after the international monetary fund step
inside by creating bailout packages for the majorly affected economies for supporting them and
avoiding default.

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Australia & GFC
The effect of the financial crisis are comparatively low in case of Australia as compared
to other countries like USA, Mexico, United Kingdom, etc. and many other countries. However,
the impact of the financial crisis mostly affected the households of Australia that resulted in a
large decline in the equity prices leading to reduction in the wealth of the Australian households
by more than 10 % within March 2009. In fact there are different contrasting ways through
which the financial crisis affected the manufacturing sector of Australia (Obstfeld, 2015).
However, financial crisis rendered a delayed impact upon Australia though it continued through
a long-term decline in the manufacturing sectors of the country of nearby 10 years. Notably, the
economy of Australia was not spared from the impact of Great Depression. It resulted in rise in
unemployment by 32 % and falling price of wheat. Alteration of the policies were made in order
to ensure that the country can escape the financial downturn and the banks do not run through
bankruptcy.
Reforms
The following reforms necessitates rapid implementation in order to ensure recovery of
the economy after the impact of the global financial crises.
 Central Bank Policy
Provision for liquidity should be created since it have to potential to remove the
insolvency of the banks and downside the risks towards stabilizing the prices and supporting the
economic activities by reducing the interest rates by suitable basis points.
 Government Support to the banking system
Injection of capital for debt recovery followed by providing guarantees on the new banks
debt issuance and assist through the asset relief schemes. Removing impaired assets and creating

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provision for limiting the valuation of losses for such assets will reduce the systemic risks and
stabilize the banking system.
 Monetary policy
Easing the monetary policy will contribute in mitigating potential disinflation risks
followed by fostering sustained growth and supporting the economy in times of inflation.
 Fiscal Policy
Long term public finances are needed to be maintained as government deficits as well as
public debts are found to rise due to the financial crisis. Funding the bank support schemes will
inevitably support the economic recovery followed by ensuring sustainability of the public
finances followed by balancing it with other government spending (Vazquez and Federico.
2015).
 Policies for sustained growth
The recovery of the economy requires simultaneous implementation of the
macroeconomic factors that stimulates aggregate demand and repairs the balance sheets of the
banks followed by encouraging credit to the economy. This will prevent potential vicious circle
of poverty. Concrete policy reformulation efforts for ensuring more capital flows in the economy
followed by revitalizing the trade of goods and services will stabilize the economic downturn and
hence should be implemented. Notably, the policy strategies that would be implemented should
be uniform and identical across the countries that are similarly affected by the financial crisis.
Thus the structural and conjectural patterns of the countries may differ though they will be able
to utilize the micro foundation of the macroeconomic stimulus based on the orientation of the
countries warranting the consistency of the economic operations within the affected country.

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Conclusion
The global financial crises are effective representation of the financial devastations that
led to economic slowdown followed by affecting the global business environment as a whole.
There is requirement of effective government intervention while incorporating financial
decisions as the decision making affects not only the country but also other countries globally.
The stock market siphons off the excess money in the economy and hence it should be boosted
followed by lowering the debt and mortgages of the banks.

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References
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valuation effects and the global financial crisis. Journal of International Economics, 96, pp.S98-
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