Recent Global Financial Crisis had a devastating affect on the entire Global Business. This Global Crisis crashes the key businesses, turn down the consumer wealth in the billions of Dollars, and a significant decline in economic movement. Experts have been pointed on so many reasons and they have been proposed so many causes. There are so many factors that directly and indirectly caused the ongoing financial crisis of 2007-2009. This started with the US subprime mortgage crisis. The housing industries of the entire world have collapsed. This happened because of the values of securities tied to housing prices to plummet in United States in 2005-2006. The complication and interdependence of many of the causes, as well as conflicting political, economic and organizational comforts, have resulted in a diversity of narratives recitation the crisis. All financial institutions have damaged. The credit availability in bank solvency declines investor assurance had a crash on world stock markets. And that is why the Global stock market has suffered large losses during 2007. Economies have gone down throughout the world in late 2008 and early 2009. As a result international trade declines like anything. "The major financial crisis in East Asia soon followed. The currency crisis in Thailand was rapidly transmitted to Indonesia, Malaysia, the Philippines, and Korea, and its impact ramified throughout the global economy. Since then, the emerging markets have experienced a steady series of aftershocks: in 1998 and 1999 capital flow reversals induced currency devaluations in Russia (August 1998) and Brazil (January 1999), and most recently recession, devaluation, and default in Argentina (2002), as well as recessions and payments problems in Uruguay and Ecuador (2002). Though the region has since recovered, East Asia's crisis remains the most severe in its depth and regional breadth." (M. Kawai; R. Newfarmer and S. L. Schmukler, 2009). Governments and Central banks responded with extraordinary economic motivation, financial strategies development, and institutional bailouts. But Risk still remains for the Global Economy.
International Monetary Fund is an Organization that exceptionally placed to help its Members to take benefits of the prospects and helps to manage the challenges. IMF has global membership of 186 countries. The IMF supports its membership by providing:
But at the Global Crisis, IMF failed to anticipate the recent financial crisis in most of the cases. And they couldn't provide the proper support to the Member Countries.
This entire study will tell about the causes of the Financial Crisis. Ways to can solve this Global crisis. The brief overview of the International Monetary Fund and their key activities. How IMF's response to the Global Crisis and how they have been criticise. Advantage and Disadvantages of the International Monetary fund. And at the later on we will try to find some solution and the recommendation to solve the Global Financial crisis.
Main Causes of the Global Financial Crisis -
"In recent years, standard academic literature has treated the twin crisis in a consistent way, regarding banking crises and currency crises as inherently separate but equally powerful occurrences. Although the forms and degrees of interaction between the two types of crisis vary among authors, they are always considered to be two very distinct and similarly determinant components of the twin crisis." (W. C. Marshall, 2009)
"The major flaw of such schemes, which this paper seeks to rectify, is the misplaced separation of the dual nature of the financial crisis between the banking and currency crises. Even though a currency crisis does not necessarily involve a banking crisis, as was the case of the Brazilian real's devaluation in 1998, banking crises in Latin America have invariably become currency crises. As such, when analyzing the twin crisis; the banking crisis must be the focal point of analysis. It is only at this junction, upon analyzing the banking crisis, that a bifurcation is needed. However, in all of cited articles, authors treat the banking crisis as a singular phenomenon that results from one core set of conditions." (W. C. Marshall, 2009)
Beside those crisis there are so many causes of crisis that experts has been raised and those have a significant effect on the Global Financial crisis. In some cases following causes has generously proportioned grounds for the Global Financial Crisis.
Growth of the housing bubble
Between 1997 and 2006, the house prices of United States had increased by 124%. This housing bubble resulted in so many refinancing homes at very low interest rates and encourages consumers to take second mortgages. But no one realized that in the long run it might create a huge problem. As a result in September 2008, near about 20% United States housing prices had declined. As a result of the prices decline, the borrowers could not refinance and with the higher interest rate they started to be defaulter. In 2007, lenders start foreclosure actions on nearly 1.3 million properties, 79% was increased over 2006. This increased to 2.3 million in 2008, an 81% increase versus 2007. By August 2008, 9.2% of all U.S. mortgages exceptional were either aberrant or in foreclosure. By September 2009, this had risen to 14.4%.
Easy credit conditions
Easy credit condition and lower interest rates persuade to have a loan. The Federal Reserve was lesser then federal funds from 2000 - 2003 and the rate target was from 6.5% to 1.0%. This was made to reduce the effects of the fall down of the dot-com bubble and of the September 2001 terrorist attacks. The Federal funds were raised again and the rates has changes drastically in between 200- 2006. This may have also some affect on the housing bubble, as asset prices normally shift the wrong way round and financial assets value declined radically.
Sub-prime lending
Sub-prime means the credit history of the particular borrowers. People who have weaken credit history and a higher risk of loan default called and the Sub-prime. Though there was a high risks involved but still those financial organizations were giving loan to the Sub-primes. Basically this is called Sub-prime leading. In United states till 2004 Subprime mortgages was less than 10% of all mortgage originations. But in 2005-2006 it has gone up to 20%. Lot of experts pointed out that this is not the main reason to cause a crisis. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that "There weren't enough Americans with [bad] credit taking out [bad loans] to satisfy investors' appetite for the end product." Essentially, investment banks and hedge funds used financial innovation to synthesize more loans using derivatives. "They were creating [loans] out of whole cloth. One hundred times over! That's why the losses are so much greater than the loans."
Predatory lending
Predatory lending indicated the practice of corrupt lenders, to go through the "insecure" or "unstable" tenable loans for unsuitable purposes. These type of loans were written into lengthily comprehensive agreements, and exchange for additional high-priced loan goods on the day of concluding. There was increasing substantiation that such mortgage frauds would be reason for the crisis.
Global Imbalances
Global financial flows has been considered in current years by an untenable outline: some countries (China, Japan, and Germany) got huge surpluses every year, while others (like the U.S and U.K.) was in shortfall. The U.S. external shortage has been reflected by internal shortfall in the domestic and government areas. U.S. scrounge cannot go on forever; the resulting pressure trigger the current financial crisis.
