Global Financial Crisis Analysis

This assignment delves into the profound impact of the 2008 global financial crisis. It explores the crisis's roots in the subprime mortgage market, tracing its escalation into a transnational banking crisis with worldwide implications. The analysis examines policy reforms implemented at both global and national levels to mitigate the crisis's effects, including Basel III regulations and the recognition of systemically important financial institutions (G-SIFI).

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Authors’ Note

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The worldwide financial crisis that was brewing for quite some time actually began to show
its influence during the middle of the year 2007 and thereafter into the year 2008. Due to the
global financial crisis (GFC) the stock markets around the world dipped, huge financial
institutions buckled or were sold out, and governments of even the wealthy nations also had
to introduce recovery packages in order to bail out financial systems in their country. People
are of the view that the ones accountable for the financial difficulty are essentially the ones
who were being bailed out, whilst contrarily, a worldwide financial crisis might perhaps
affect the living of almost each and every person in an ever more inter-connected earth. In
this way, the crisis can be said to be closely associated to balance sheets right the way
through the nation for mainly financial institutions, for every households and for governing
bodies. This global financial crisis (GFC) during the yeat 2008 can be regarded as a big event
in the entire history of global economy.
Subprime mortgage crisis
In essence this could be easily observed in subprime mortgage crisis. However, in normal
circumstance, subprime mortgage would not be carried out at all. One needs to possess
adequate collateral at the time of lending a mortgage in order to shield oneself from any
probable financial risks in case if the property holder defaulted. Nevertheless, people
intended to gather more money and entered into the riskier arena of subprime mortgage. It
was a very risky affair that could straightforwardly go wrong. In its place, it can be observed
that everyone did enter into that risky business (Haas and Lelyveld 2014).
There were topical shocks that affected the macro economy that in turn led to the global
financial crisis. The first major blow and the macroeconomic shock was the intense decline in
the housing prices. During the decade that led to the year 2006, prices of houses increased
fast by over and above 30% during the next 3 years. Fuelled by the low rate of interest during

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the late 1990s early 2000s, and by ever-loosened standards of lending, this prices enhanced
between the year 1996 and the year 2006 at a mean rate of approximately 10% every year.
Economic gains were considerably larger in certain coastal areas namely Boston, San
Francisco, Los Angeles as well as New York. Strikingly, the overall national index for
particularly housing prices recorded in the United States decreased by nearly 31.6% during
the period 2006 and 2009 (Vazquez and Federico 2015). Analysis of this huge rise and fall in
the prices of the housing brings us to the answer and helps in understanding the severe
financial turmoil worldwide. The graph below shows that the sub prime lending sections
considerably allowed mortgages at high level of loan to valuation ratio.
Graph: Subprime lending standards
(Source: Ang et al. 2015)

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Worldwide Saving Glut
Attracted by the low rate of interest linked to the worldwide saving glut, huge number of
borrowers went for mortgages, and possibly believed that housing prices would persistently
increase. Huge numbers of borrowers however took out mortgages and bought homes
between the period 2000 and 2006. In essence, these numbers primarily include higher
number of loan applications that did not satisfy the mainstream standards owing to the poor
credit records or else high level of debt to income ratio. However, against this background,
after two years of enormously low rate of interest, the Federal Reserve started to enhance the
target of fed funds and the rate that was charged for basically overnight loans mainly between
banks. Primarily, between the period 2004 and 2006, the Federal Reserve increased the rate
from nearly 1.25% to nearly 5.25% due to concerns regarding rise in inflation (Ang et al.
2015). Essentially, this was a reasonable strategy as per the Taylor Rule, the rates of interest
were low in the previous years and the Fed increased them to particularly a feasible stage. In
a specific environment with sub-prime mortgage facing several mortgages where rates were
moving from basically low teaser rates to very high market rates, the impact of the housing
prices was even sterner (Bénétrix et al. 2015). The graph below shows the increase in the
value of the debt to particularly the value of the housing stock.

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Graph: US mortgage debt
(Source: Bénétrix et al. 2015)
As per the reports published, approximately 16% of the subprime mortgages with adjustable
rates were registered to be default. Ever since that time, the issue has spiralled since low
prices of housing led to defaults, and this lowered prices of housing even in a more vicious
cycle.
The genesis of the present financial crisis also has its source to certain extent to the global
financial crisis that happened a decade age. Claessens and Kodres (2014) noted that financial
turmoil during the 1990s created a significant shift and transformation in particularly the
macroeconomics of several developing nations, mainly in Asia. Essentially, prior to the
period of crisis, many of the nations had experienced trade as well as current account deficits
and they were investing considerably more than what they were saving. In essence, this
investment was primarily funded by way of borrowing from around the world. This

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necessarily led to steep decline in the rates of lending from around the world, sharp decrease
in the currency values and their entire stock market and recessions. However, after this crisis,
these nations enhanced their savings considerably and decreased their foreign borrowings and
in place became large lenders to the entire world particularly to the United States. Rey (2015)
argued that this role reversal generated a worldwide saving glut in which capital markets in
several advanced nations were soaked in extra saving for excellent investment opportunities.
Fundamentally, this investments demand contributed towards increasing asset markets
particularly in the United States, counting the stock market as well as the housing market. In
actual fact what occurred was mainly by means of creation of several mortgage-backed
securities.
Securitization
As rightly put forward by Greenglass et al. (2014), in order to comprehend the financial
turmoil, it is important to take into consideration a global innovation that is referred to as
securitization. Securitization is primarily founded on a huge extent on the assumption that a
huge proportion of the mortgages will necessarily not go bad all at once. Essentially, after the
entire history of the housing price bubble, there were regions that necessarily experiences
huge decline in the housing market. At the time when the Federal Reserve experienced rise in
the rates of interest, even more number of sub-prime mortgages happened and prices of
housing decreased nation -wide and this in turn led to more number of defaults. Baylis et al.
(2017) noted that securitization did not protect financiers from particularly aggregate risk.
Since complicated financial instruments were generated and traded, this became quite
difficult to understand the extent of exposure a specific individual bank had to specific risks
of this kind. Particularly, in the year 2007, there were forces that necessarily acted and banks
roughly increased the rates of interest that banks levied one another. In case if a bank A
considers that bank B is supported by huge number of bad mortgages, then in that case it can

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demand a premium for lending money or might perhaps decide to stop lending at all.
Subsequently, the specific spread that existed between T yields as well as interbank rates of
lending increased significantly. However, once this particular crisis developed, these rates
increased to around 3.5% and the overall amount of lending decreased leading to crisis of
liquidity.
Movement in oil prices
As correctly mentioned by Baylis et al. (2017), decrease in the prices of housing as well as
the global financial crisis were not adequate, the entire world also suffered from huge
movements in the prices of oil.
Possibility of reoccurrence of GFC
As regards, the repetition of the financial crisis it can be said that certainly, there might occur
another boom as well as bust however the specifics might possibly be different. History is
necessarily stuffed with bubbles along with crashes and this reflects that it is quite inevitable
since each generation tends to forgets and has the need to relearn all the lessons of the earlier
period. Opportunely, in the post-GFC situation observed so far, no wide-based bubbles on the
entire scale of essentially tech boom or else US housing/credit rumble can be seen. In
essence, E-commerce stocks such as Facebook together with Amazon can be considered as
candidates, however they can be observed anywhere near the profits that were observed
during the tech boom of the late 1990s (Baylis et al. 2017).

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Graph: Global Asset Bubbles
(Source: Claessens and Kodres 2014)
It can be hereby observed that the worldwide debt has increased to high level in comparison
to the worldwide GDP.

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Graph: Worldwide public debt
(Source: Claessens and Kodres 2014)
Nevertheless, as the graph shows above there is increase in debt. However, higher levels of
debt do not necessarily mean financial crisis. But it can be seen to trend upward for decades
and much of the higher rate of growth of debt in different developed nations during the period
of post worldwide financial crisis can be seen in the public debt and interest burdens of debt
can be observed to be low due to lower rates of interest (Claessens and Kodres 2014).
Scale and impact of GFC in economies of different countries including own nation
There are many who believe that Asia was sufficiently decoupled from particularly the
Western financial system. Asia did not suffer from the sub-prime mortgage crisis just like
many of the nations of the West. However, it did face certain knock on impacts and had
higher exposure to issues generated from specifically the West. There were Asian nations that
have witnessed their stock markets to suffer and faced deceleration of currency value. India
and China that are among the fastest developing nations also faced sharp slowdown. India
developed by a monstrous 9% during 2007-08, however during 2009 the rate declined to
7.1%. Similarly, China also slowed down to 8.1%. Again, in Europe as well several leading
financial institutions botched. The economy of Iceland that was hugely dependent on
particularly finance sector faced severe economic issues due to the GFC (Ang et al. 2015).
However, the causes and the consequences of the global financial crisis can be discussed with
special emphasis on the nation Australia. It can be hereby stated that the most obvious
influence of the global financial crisis on majority of the Australian households was the sharp
decrease in the prices of equity that subsequently reduced the Australian household wealth by
approximately 10% during 2009. Nonetheless, ever since the period of trough in particularly

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the equity market, the regional market managed to recover over half of the decrease by the
closing of the period 2009. Essentially, the value of the Australian dollar also started to
depreciate fast as the financial crisis started to intensity, decreasing by more than 30% from
the period of 2008. During the period of bankruptcy of the company Lehman Brothers,,
situations in the entire foreign exchange was mainly illiquid that led to the intervention of the
Reserve Bank of Australia and enhancement of the liquidity (Claessens and Kodres 2014).
Ever since the period of 2009, as worries and fears among the minds of the people were in
check, the Australian currency began to recover, replicating the comparable strength of the
entire Australian economy. The credit markets have also proved to be very much resilient
than several other nations that subsequently directed towards comparatively less amount of
government intervention in Australia.
Regulatory Responses
Policy makers around the world have intended to correct the damage in the financial system
as well as economies by way of enacting several financial reforms both at the global as well
as domestic level. Some of the significant reforms include adoption of the Basel III
(requirements for capital) counting a countercyclical buffer of capital along with a surcharge
for internationally significant financial institutions (that is G-SIFI). This reflects the first
worldwide attempt to establish a macro prudential tool. Reforms also include arriving at the
agreement on particularly one out of two envisaged standards of liquidity (that is to say the
Liquidity Coverage Ratio) (Ang et al. 2015). Some advancement was also made in the
process of lessening too-big-to-fail by recognition of the G-SIFI as well as domestically
crucial banks, higher necessity of the capital adequacy, intense scrutiny. Again, principles for
the purpose of appropriate compensation practices were also adopted for averting perverse
incentives for risk taking.

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In conclusion it can be said that this current study helps in understanding the fact that global
financial crisis can be considered as the most important incident after the Great Depression of
the year 1929. It is necessarily considered by economists as the worst financial crisis since
the period of Great Depression. This current study elucidates the fact that this financial crisis
started with the sub prime mortgage crisis that subsequently translated into transnational
banking crisis and magnified the financial influence internationally.

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References
Ang, A., Masulis, R.W., Pham, P.K. and Zein, J., 2015. Internal Capital Markets in Family
Business Groups During the Global Financial Crisis.
Baylis, J., Owens, P. and Smith, S. eds., 2017. The globalization of world politics: An
introduction to international relations. Oxford University Press.
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 Kodres, L.E., 2014. The regulatory responses to the global financial crisis:
Some uncomfortable questions.
Greenglass, E., Antonides, G., Christandl, F., Foster, G., Katter, J.K., Kaufman, B.E. and
Lea, S.E., 2014. The financial crisis and its effects: Perspectives from economics and
psychology. Journal of Behavioral and Experimental Economics, 50, pp.10-12.
Haas, R. and Lelyveld, I., 2014. Multinational banks and the global financial crisis:
Weathering the perfect storm?. Journal of Money, Credit and Banking, 46(s1), pp.333-364.
Rey, H., 2015. Dilemma not trilemma: the global financial cycle and monetary policy
independence (No. w21162). National Bureau of Economic Research.
Vazquez, F. and Federico, P., 2015. Bank funding structures and risk: Evidence from the
global financial crisis. Journal of banking & finance, 61, pp.1-14.