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Global Financial Crisis
The most recent financial crisis has badly affected the Global economy. Individuals, businesses, and Governments; every entity has taken its impacts in one way or another (Burger, Coelho, Karpowicz, & Tyson 2009). Since its arrival, financial crisis has posed big threats to the world markets. The countries are trying to overcome the bad impacts of this crisis but have failed to recover their positions due to severe recession and worsening economic conditions (U.S. Department of the Treasury 2012). Economists and Financial Analysts have discussed various reasons for this Global financial crisis; a big downturn in the financial and housing mortgage sector is said to be the biggest reason of all (Donath & Cismas 2009). The Global financial crisis has hit almost all the sectors of the economy which have not only hampered the industrial growth in the countries, but also caused serious challenges and issues for the Governments and regulatory bodies (Independent Evaluation Group 2012).
This paper gives a comprehensive review of the recent Global financial crisis which has badly shaken the world economy in a quite short period of time and made the businesses and Governments helpless in this Recession period. It starts with a brief history of the financial crisis; what caused the financial crisis, where was it originated, and what economists believe about it. The later sections discuss the different aspects of the global financial crisis; including its major impacts on the different sectors of the economy, what strategies businesses and governments have been adopting to overcome its consequences and bad impacts, and what are the potential impacts which this financial crisis can bring in the near future as well as in the long run.
HISTORY OF THE FINANCIAL CRISIS
The most recent financial crisis started in late 2006 in the United States when its largest banks, insurance companies, and other financial institutions noticed a big decline in their sales and profitability (Magdoff & Foster 2009). This downturn in the financial performance was quite minor in the beginning, but suddenly increased up to such a large extent that these banks, insurance companies, and financial institutions could not survive in their industry and went bankrupt due to huge unpaid obligations. The financial crisis started in the financial sector of the United States, but spread to the whole world markets in a very short period of time (Corker 2012).
Housing Finance and Mortgage:
Economists and financial analysts are of the view that the Global Financial Crisis was mainly due to the over-investment of the general public in housing finance and mortgage contracts. Before this financial crisis hit the United States market, the housing mortgage and finance market was dominated by a few large commercial banks (Donath & Cismas 2009). They were in a stiff competition with the local and international banks and financial institutions that offer these facilities at comparatively lower interest rates than banking institutions (United Nations Organization 2009). In order to beat these competitors, the local banks in the United States decreased their interest rates and made their terms to avail the housing and mortgage facilities more flexible and relaxed (Burger, Coelho, Karpowicz, & Tyson 2009).
Competition among Banks and Financial Institutions:
Keeping in view an attractive market in the United States, more new international banks entered its markets and started offering housing finance at even cheaper rates. This competitive environment took the shape of a price war among the local and international banking institutions and finance companies (Independent Evaluation Group 2012). Due to this price war, the customers got attracted towards these facilities and started availing them without looking at their re-paying ability. The result of this over-selling was seen in the form of a big disaster to the United States' banking industry (United Nations Organization 2009). A significant percentage of borrowers was unable pay its liabilities to the respective banks and financial institutions due to limited income and extra expenditures of monthly interest payments (World Bank 2012).
Bankruptcy of the Largest Banks:
This was the start of the financial crisis in the United States market. The banking companies and financial institutions had to sale out their short-term and long-term securities in order to pay for the loans. It resulted in a significant decline in the volume of their deposits and long-term assets (Magdoff & Foster 2009). When they found no other means of funding those loans, they have to knock the door of the Government for bail out (Corker 2012). This financial crisis badly shocked the world economies when few of the largest commercial banks of the United States went bankrupt. Lehman Brothers, Morgan Stanley, Goldman Sachs were among the most successful banking companies of the country, but took the bad impacts of this financial crisis and went bankrupt due to non-payment of their liabilities to the housing sector (Barth 2009).
PRESENT CONDITION OF THE FINANCIAL CRISIS
The financial crisis started from the financial sector of the United States but spread over the whole world economy in a quite short span of time (U.S. Department of the Treasury 2012). The world economy started experiencing its impacts when the investors from the United Arab Emirates and other rich economies also had to face the same bad debt issues as the financial sector of the United States had seen in its housing mortgage and finance facilities. At present, the world economy is in a great recession where economic performance of the financial institutions has significantly decreased, the industrial growth has slowed down, and international trade has got discouraged with the poor economic conditions of a large number of countries in the world (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012).
The Governments of different countries are taking steps to recover the positions and economic situations of the financial and services sector from this crisis. For this purpose, they are recapitalizing the financial sector so that it becomes stable and retrieve its past performance. Moreover, this financial crisis has made a large number of governments to run their economies in fiscal deficits. They are unable to achieve the Balance of Trade and control their expenditures to match the revenues (U.S. Department of the Treasury 2012). The similar worse conditions are faced by business organizations in the international world markets.
Due to this financial crisis, the purchasing power parity of the customers has badly affected which has resulted in a decrease in the number of customers for each particular product manufactured by international business organizations (Donath & Cismas 2009). This thing has shrunk the growth and profitability of these organizations and forced them to keep their business operations limited to their local markets instead of expanding into new international markets (Burger, Coelho, Karpowicz, & Tyson 2009).
EXPECTED OUTCOMES OF THE GLOBAL FINANCIAL CRISIS
The global financial crisis was started from the housing sector in a single economy, but spread to all the sectors and industries by hitting the entire world economy. A large number of economists and financial analysts have presented their view on the expected outcomes and impacts of this global financial crisis in the future (Independent Evaluation Group 2012). The majority of the researchers and economists believe that this economic crisis will last much longer than previous global crisis which hit the world economy three times during the previous century (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012). They argue that the recent financial crisis has not finished yet; it will continue to impact the financial sector and the other sectors in the services industry in the short run (Barth 2009).
Impacts in the Short run:
The economic downturn will first impact the manufacturing sector due to which the industrial growth will be slowed down. As a result, the economies will experience a significant decrease in the Gross Domestic Products and National Incomes (United Nations Organization 2009). This decrease in the GDP and NI economic measures will automatically hit the services sector due to poor financial performance and miserable industry conditions (Corker 2012). The re-paying abilities of the industrial concerns will also decrease which will keep them restricted from availing high interest long-term loans from the financial sectors (Donath & Cismas 2009).
These negative impacts of the financial crisis will also impact the consumption patterns of individuals, businesses, and Governmental agencies. For example, the consumers will find it harder to keep a balance between their incomes and expenditures due to deep recession and high inflationary pressures. They will either shorten their needs or look for substitute products to save money (U.S. Department of the Treasury 2012). Similarly, business organizations will feel big hesitation in expanding their operations in the international markets; especially in those countries which are largely affected by the Global financial crisis. The Governmental bodies will also cut down their expenditures keeping in view the increasing fiscal deficits and deep recession in the world economies (U.S. Senate Committee on Banking, Housing, and Urban Affairs 2012).
Impacts in the Long run:
The same situation will be faced by the individuals, businesses, and governments in the…[continue]
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