Global Financial Crisis
The global finance was moving towards its peak from 2003 to 2007. After its robust performance the world economy has since August, 2007 been experiencing adverse developments on several fronts. The crisis first surfaced in the US subprime mortgage market in the third quarter of 2007 and soon assumed a global dimension, encompassing both financial and real sectors. The crisis is also because of macroeconomic imbalances, poor risk management practices, and weakfinancialregulations and supervision
These imbalances and the accompanying capital flows caused unusually low interest rates in the United States and European banks, intensifying the search for higher yields and increased leverage and risk taking by relying on complex and opaquefinancialinstruments. In the absence of proper regulation and supervision, the rally went on so long as the arrangement wasself-sustaining.
Indeed, the on-going troubles are the most serious the world economy has faced since the Great Depression in the 1930s. US economy is considered as the major and powerful when compared to the rest of nations. In US, manufacturing industry is the main business and ranked 1st in manufacturing sector. But because of financial crisis number of manufacturing sectors suffered a lot. From manufacturing they changed to post manufacturing sectors. The developed nations started outsourcing service sectors and hence there was financial crisis globally. With wealth build-up, there was a consumption boom and the United States saving rate declined sharply.
The main reason for financial crisis is the increased debt burden or over leveraging of money in major banks. The problems of bank became so large that they lost capital reserves and turn to government for bail out. Since then large financial institutions got collapsed. Major stocks got down by 45% and many people lost their money and many people lost their jobs too.
The slowdown in growth was mainly because of the bursting of the US housing bubble and the accompanying financial meltdown that impacted negatively on both investment and consumption. The banks and investors systematized the risk by taking advantage of low interest rates to borrow tremendous sums of money that they could only pay back if the housing market continued to increase in value. The failure of agriculture due to change in climatic conditions is also a reason for economic slowdown. The costs of non-agricultural products increase because the costs of production of agricultural products increase with rise in wages. Thus the two reasons one originating in the US housing and financial markets and the other arising from a harvest failure would thus generally be stagflationary.
Due to globalization not only the larger banks show signs of crisis but potentially everyone. Since the banks started mortgaging they increased the interest rates to the borrowers. As a result people find their mortgages harder and expensive to re-pay. As a result consumption of goods gradually reduced and hence more businesses struggled to survive leading to further job cuts.
Securitization is done in banks, people invested money and they are paid interest. The banks lend their money to borrowers with higher tax. Bank started issuing home loans, car loans and credit cards in large extent. This system was unstable and lead to financial crisis. When the interest rates were increased people find difficult to repay and all the money were bail out. According to Bloomberg US tax payers alone will spend $ 9.7 trillion in bailout plans, around $ 2 trillion been spent by UK and European countries. 33% of the value of the world companies has been wiped out by this crisis.
The inflation rates in developed countries were heavily rising in almost all commodities. Not only the inflation rise above the central bank's targeted rate, but there was also an acceleration of price increases until August/September 2008, inflation has started abating since then, but even in November 2008 remained at a significantly higher level than that obtaining at the beginning of the crisis.
The fast growth andglobalintegration of high-saving economies created a shortage of adequately safe assets. The result was massivefinancial industry made extra strides to increase returns on investments by intensifying risk taking. Given the role of the central banks in surplus countries in channelling the flows into the US,globalimbalances played a key role in the current
