The Global Financial Crisis: Causes, Impact, and Solutions

This report provides a comprehensive overview of the Global Financial Crisis (GFC), also known as the Great Recession. It delves into the potential causes, including the subprime mortgage bubble, currency crises, speculative bubbles, market instability, greed, lack of international monitoring, and excessive leverage. The report examines the scale and impact of the crisis across various countries, highlighting the effects on GDP, exports, remittances, aid, and capital inflows. It also discusses the steps taken to mitigate the crisis, such as bailouts, reforms in credit rating agencies, and improvements in corporate governance. The report analyzes the economic damage, including lost output, exports, remittances, aid, and capital inflows, emphasizing the challenges faced by developing and emerging economies. This assignment is available on Desklib.

The Global Financial
Crisis

Table of Contents
INTRODUCTION...........................................................................................................................1
Possible cause of financial crises:...............................................................................................1
Scale and impact of GFC in different countries..........................................................................4
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................8

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INTRODUCTION
The global financial crisis is considered as one of the worst phases in global finance
sector. This was the phase which is known as “Great Recession” (Bresser-Pereira, 2010). This
report highlights the scenarios which were occurred the crisis. There are factors which were
responsible for the crisis and the solution factors explained in this report. It is the most
significant worldwide economic disaster after 1929. Mortgage crisis is one of the subprime crisis
events which are discussed in this report. Possible causes and of the financial crisis and its future
possibilities are defined in this report. Its scale and impact are defines in respect of economic
structure of various countries. Actual reforms are eventuated with practically subject to
scenarios.
Possible cause of financial crises
The financial crises started in 1929 which led to sudden fall of stock market and globally
damage the whole market system. It leads to long lasting recession and unstable microeconomics
policies as well as excessive credit boom and large capital inflow and balance sheet fragilities
during the 1923 and 1932. The GDP falls up to 15%. By comparing, there is reduction of 1% in
global GDP between 2008 and 2009 during the depression has been said that by the newspaper
all over the world that the countries have overcome in 1930 when credit was tight and mortgage
were herd to sell. Therefore, in order to revive the market, the government had to step in to form
of many regulation and laws. Although, most of nation affected of great depression and it is
continues till world war. The rise in consumer debt reflected the response of consumer to the low
interest rates due to this the undeveloped country badly affected from this crises has the major
adverse impact as the personal income, profits and prices fell down during the global trade
dropped out by more than 50% .Unemployment rose up to 25% in US and after some year it rose
to 33%.
Cause of financial crisis
The financial crises is also known as the global financial crisis. There are various factor
which led to financial crises are as follows:
Subprime mortgage bubble:

The participating factor was a high default rate in the united rate subprime mortgage
factor The expansion of this sector was encourage by the following factor ;
low interest rates
The community reinvestment act an us federal law designed to help low- and moderate income
get mortgage loan.
Many of these subprime loan bundled and sold, finally accruing to government agencies led to
contribution to a glut of risk lending.
Bank crisis
High mortgage approval led to a large pool of home buyers which drove up the
housing prices there are very large number of house owner to borrow against their homes as an
apparent windfall. This bubble would be burst by a rising single-family residential mortgages
delinquency rate beginning in august 2006 and peaking in the first quarter in 2010.
Currency crisis:
The currency crisis also called devaluation crisis which is normally considered as apart of
financial crisis (Bounegru and Forceville, 2011). It is defined as crises as occurring when a
weighted average of monthly percentage depreciation in the exchange rate and monthly
percentage decline in the exchange reserves exceeds its mean by more than three standard
deviations.
Speculative bubble and crashes:
A speculated bubble exists in the event of large sustained over class of assets based solely
on the expectation that they can later resell it at higher price, rather than calculating income it
will generate the income in future. Market instability The condition of the business at the time of recession are dynamics in
nature and due to fluctuation in the current bond the function of the get disturbed which
further effect the purchasing power of the market got deprived off and lead to financial
crises (Acharya and Schnabl, 2010).
 Greed:
The want of the rich house owner has increase and they tend to do unfair practices like
selling and buying the property illegally raise the price in the real state and in other hand the
buying capacity of the people are not so high creating an adverse condition of financial crisis.
 An unbroken international monitoring system:
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This is one of the most relevant region behind the financial crisis took place. There is no
proper collaboration between the import and export activities between developing and developed
company which led to great extent of loss in business and as well as loss of currencies value.
Leverage:
Excess leverage is at the centre of all banking crises. Leverage goes beyond balance
sheets. It embedded in off balance sheet instrument such as derivatives and dangerous hidden
leverage in structured securities (Baker, 2010). The bankers and certain highly leveraged hedge
funds will squeal and the profit will fall and the number of transaction get loss.
Governance;
It must recognise that the financial system has expanded and interconnected to the point
that it is now effectively a commons impacting all citizens.
Steps used for reduce the financial crisis;
Bailout:
The purposed financial reform bill also sets the capital and liquidity requirement for the
large banks, requirements that were formerly set under the repealed process.
It also specifies the large banks cannot have the debt to equity ratio of more than 15 to1.
Credit rating agencies:
The regulation which is left regarding the banks and other financial institution ask to melt
down those regulatory agencies (Aldamen and et. al., 2012). The other regulatory players are
bond credit rating agencies that rate bonds issued by the large banks ,they gave the large banks
who were putting these loans package together their highest credit ratings even through the toxic
assets comprising the loan packages were incredibly risky.
Ethics and corporate governance:
Banks should not practice the financial ethics instead of practising prudence with
depositors money in 2008 the large banks bet should bet against its customer using risky credit
default swaps.
Cleaning up the damage
The international financial architecture failed to stop the 2008 crisis, it lots effort to
cleaned up the damage (Global Financial Crisis, 2018). It double the financial resources of IMF
and coordinate the relaxation of the monetary policy and 2 percent fiscal stimulus for the
advance countries . It compiled of a list of banks and insurance companies for the oversight, and
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conducted “stress tests” to more carefully supervise them. It need to improve its surveillance and
the regulation of the capital flow by member by members countries strengthen its financial base,
and better coordinate the global financial safety. The safeguard which taken to only abolish the
financial crisis affairs.
Scale and impact of GFC in different countries
Global Financial Crisis (GFC) was one of the largest impactful crisis in global financial
and economical structure. It exploit the emerging and leading economies at large level during the
financial year 2008-09 (Helleiner, 2014). there are various factors affect the economical
structure. Low employment rates, lack of society safety, net means were the major effecting
factors which damage the global economical phenomenon. Some of the poorest countries has
become penurious on other developed countries. As per financial crisis report approx one
hundred and twenty million people were living on less than £1.43 a day and eighty nine million
or more people were living less than £0.89 in UK during the crisis.
Impact and effect of crisis is impossible to measure exactly because there are certain
things are not cleared such as origin of crisis, split form of damage, uncleared reports and
clarifications in respect of fair financial losses. There are reasonable aspects and estimations
were made to measure the projected damage of crisis. Forecasting and projecting techniques
were used to make an estimated damaged report in respect of financial crisis. There are various
sources and tools were used to manage the crisis such as demand in advanced economics,
slumped despite these efforts by the governments and central banks to support the economies the
crisis couldn't control. There were negative impact and consequences were seen in developing
and rising economic countries.
The major areas which get impacted was recorded in lose of human capital, lost jobs,
reduced consumption level, increased poverty and reduced opportunities (Tienhaara, 2014).
There were various attempts made in respect of evaluation of crisis amount. One of the major
problem which occurred more in evaluation process were from where should I start and where
should it completing. After overall analysis four variable were divided in respect of evaluation of
crisis. These four variables were outputs, exports, remittances, aid and capital inflows. It was
quite reasonable to resist the factors in limit to critical evaluation and measurement. It was
measured that the effect of crisis would remain for several years and developing countries would
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have to put extreme level of efforts to recover and overcome the damaged amount. Below are the
factors discussed in respect of damage:
Lost output
There was a huge amount of slowdown and downfall record in respect of developing and
emerging economic countries. Overall GDP growth of emerging countries fall down from 8.3%
percent in 2007 to 6.1 percent in 2008 and then after it start declining till 2009. growth rate of
GDP was recorded as 2.47% in 2009 (IMF 2010a). the real GDP of countries and commonwealth
of independent states were central and eastern Europe (CEE) and another area also get impacted
which was Hemisphere contracted in 2009 (Sun and et. al., 2011). while there were many
developing countries in Asia, sub-Saharan Africa, and the middle east and north Africa (MENA).
The real GDP growth rate gets below from average rate in the year leading up to the crisis.
Lost Exports
There are major challenges and factors were described in respect of sustainable declines
in exports. As per global export report shows various figures and measurements in respect of
export growth. As per current it is estimated that the export grow up by only 4 percent in 2008
fell by over 8% in 2009.
Export Growth Difference from 2003-07
Region 2003-07 2008 2009 2010 2008 2009 2010
Sub-Saharan Africa 6.4 0.3 -7 7 -6.1 -13.4 0.6
MENA 7 2.4 -6.4 4.2 -4.6 -13.4 -2.8
Western Hemisphere 8.3 3.1 -8.3 8.6 -5.2 -16.6 0.3
All 11.5 4 -8.2 8.3 -7.5 -19.7 -3.2
CEE 10.6 7 -10.8 4.8 -3.6 -21.4 -5.2
CIS 10 -1.4 -9.5 7.7 -11.4 -19.5 -2.3
Lost remittances
Effect of lost remittance change from region to region. Some of the parts majorly effected
by the crisis as Caribbean and Latin America (Acharya and Schnabl, 2010). CIS countries also
get effected by which was high in remittance from Russia. East and South Asia also suffered
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much less and several times. The trend set was made in respect of Africa being more heavily
effected other than sub-Sahara countries as per report of world bank.
Lost aid
As per the latest figures from the Coed's Development Assistance Committee (DAC) it is
suggested that the aids got impacted more than the lost of outputs, trade and remittance. As per
DAC report real terms get increased 0.7 percent in official development assistance in 2009.
which lifted the share up to 119 billion US dollar and 0.31 percent of gross national income.
Lost capital inflows
Capital inflows highly affected by the Global Financial crisis in respect of developing
and emerging countries (Nissanke, 2012). Declension rate was high in net capital inflows and
investments. Artificial efforts were also becoming fail and couldn't support the capital structure
of countries. Level of inflows were below in compression of 2004-06. the inflow of capital were
moderate in 2008 which was equal 2003 whereas the inflow was equal for 2008 and 2009.
Lost revenues and other fiscal effects
As per report there were also some additional factors were records which were associated
with the profitability and income structure of companies. Lower inflation, strong fiscal positions
and reduced debts were the supporting factors included during the year 2008. as per the report of
IMF approx one third of low income countries were introduced subject to fiscal stimulus. While
there were some factors considered as automatic stabilizer to operate financial crisis. As per the
report 2.7 percent of GDP recorded in 2009.
There are some actions were recorded in respect of short-term period. Government of the
UK took certain decisions in respect of reducing the deficit with optimum reserved (Joyce, Liu
and Tonks, 2014). It is trying to reduce the deficit over medium-term. Fiscal consolidations took
place to enhance the structure of company and in respect of fiscal position to a more sustainable
state.
Increased poverty and lost lives
Financial crises was effected in various fields subject to poverty levels which remain
failed to connect the economy with the factors (Hunter and et. al., 2012). The measurement of
damage become impossible for bifurcated areas as integrated levels and external levels. IMF
report indicate towards the lose of outputs approx US$2.6 trillion. Exports will be 20 percent and
moreover the crisis let the fiscal deficit up to US$1trillion which was lower in than US$100
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billion. Official aids were recorded as $20 billion which was the short of the level targets in
2005.
CONCLUSION
This report is defined in respect of the Global Financial Crisis. There are some possible
factors and causes are defined in respect of effecting the economical structure of different
emerging and economical countries. There are major crisis such as mortgage bubble, bank crisis,
demand and capital inflations discussed at global and domestic level. Measurement of damages
are described in respect of lost of outputs, exports, financial aids, capital inflow, remittance loss
and poverty.
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REFERENCES
Books and Journal
Acharya, V. V. and Schnabl, P., 2010. Do global banks spread global imbalances? Asset-backed
commercial paper during the financial crisis of 2007–09. IMF Economic Review. 58(1).
37-73.
Aldamen, H. and et. al., 2012). Audit committee characteristics and firm performance during the
global financial crisis. Accounting & Finance. 52(4). 971-1000.
Baker, A., 2010. Restraining regulatory capture? Anglo-America, crisis politics and trajectories
of change in global financial governance. International Affairs. 86(3). 647-663.
Bounegru, L. and Forceville, C., 2011. Metaphors in editorial cartoons representing the global
financial crisis. Visual Communication. 10(2). 209-229.
Bresser-Pereira, L. C., 2010. The global financial crisis and a new capitalism?. Journal of Post
Keynesian Economics. 32(4). 499-534.
Hunter, W. C., and et. al., 2012. The Asian financial crisis: origins, implications, and solutions.
Springer Science & Business Media.
Joyce, M., Liu, Z. and Tonks, I., 2014. Institutional investor portfolio allocation, quantitative
easing and the global financial crisis.
Nissanke, M., 2012. Commodity market linkages in the global financial crisis: excess volatility
and development impacts. Journal of Development Studies. 48(6). pp.732-750.
Sun, W., and et. al., 2011. Corporate governance and the global financial crisis: International
perspectives. Cambridge University Press.
Tienhaara, K., 2014. Varieties of green capitalism: economy and environment in the wake of the
global financial crisis. Environmental Politics. 23(2). pp.187-204.
Helleiner, E., 2014. The status quo crisis: Global financial governance after the 2008 meltdown.
Oxford University Press.
Online:
Global Financial Crisis. 2018. [Online]. Available Through:
<https://www.canstar.com.au/home-loans/global-financial-crisis>
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