The Global Financial Crisis, Impact On The World Economy

The Star · #1 Wednesday, February 18, 2009

THE GLOBAL FINANCIAL CRISIS, IMPACT ON THE WORLD ECONOMY

INTRODUCTION
The Global financial crisis was triggered by the sub- prime mortgage crisis in the US.This has destabilized the financial markets of the developed world leading to collapse of notable names in the banking business. Production in these economies has also been adversely affected leading to a decline in output.

THE CAUSES
Globally, companies and individuals have an ever increasing demand for capital for both personal and corporate investments.Traditionally, banks have been very conservative and stringent in their requirements.This males access to finance difficult for the majority of the people.Banks and other financial institutions in the United States of America have gone through a long period of inappropriate lending .Relaxation of lending terms for mortgages was as a result of the boom in the housing sector.Millions of Americans with poor credit history who might not have bought their homes were ranted sub- prime mortgages.
Traditionally banks finance lending using deposits from customers.With increasing demand for mortgage loans, banks moved to a new model where mortgages were being issued on the bond market.This led to the growing of the mortgage bond market as mortgage brokers focused on less than ideal clients.
This proved to be very profitable as banks earned a fee for each mortgage sold and urged brokers to sell more and more.
The sub- prime mortgages, referred to as Adjustable Rate Mortgages ( ARM) had a fixed payment for two years.Then reset to higher ( double the interest rate) rates and became more expensive for the people to repay.millions of Americans are having their homes repossessed due to failure to repay the mortgages. House prices which have been falling at an annual rate of 4. 5 percent in the past 3 years and are expected to fall by at least 10 percent in 2008.
OTHER SHOCKS TO THE GLOBAL ECONOMY

The effect of the global financial crisis was worsened by rising global energy and commodity prices which pushed up inflation.Emerging and developin countries have particularly experienced strong rises in prices reflecting the high weight of food in their consumption baskets.

IMPACT ON THE US ECONOMY

The banking industry has been badly hit as many of the mortgage bonds backed by sub- prime mortgages have fallen in value.As a result of the bad debts banks became reluctant to lend and this led to a credit crunch.A slow down in the building industry which contributes 15 percent to US output has had a ripple effect on other industries especially makers of durable goods.

Bailouts of financial entities

Before the financial crisis reached its peak in the US, the federal government bailed out investment bank Bear Stearns with nearly $ 30 billion to avert a major financial default. It invested as much as $ 200 billion in preferred stock of the loss- plagued finance giants Fannie Mae and Freddie Mac and at least $ 5 billion in their mortgage securities; It further provided an emergency loan of $ 85 billion to American International Group ( AIG) Inc. in return for an ownership stake of as much as 80% in the stricken insurance giant.

The Collapse of Lehman Brothers

Ranked among the world's top investment banks, the Lehman Brothers expanded a ressively into property related investments including the sub- prime mortgages.The sub- prime crisis with the decline in value of housing forced the company to ta e huge write downs on the value of those assets and led to the loss of about US$ 14 billion. This further led to Lehman’s prime customers pulling out their monies into much safer investment avenues e. . investing in government bonds. This contributed to the company’s filin g for bankruptcy protection and hence its fall. The collapse of the company put tens of thousands of jobs around the world at risk.
The impact was also huge in other major economies considering the integration of the financial markets and the global nature of business today.

IMPACT ON OTHER DEVELOPED COUNTRIES AND
EMERGING ECONOMIES

Financial markets in the developed world have been adversely affected by the financial crisis. This has weakened growth in these economies.IMF projections show that by end of 2008 and early 2009 most developed economies will be on the verge of a recession if not in a recession.The emergin economies have to a great extent remained resilient to the global financial turmoil.
However the strong growth in these economies has been affected by the global down turn in economic activity, hence g rowth is expected to moderate.
The financial systems in developing economies however, have remained resilient to the financial woes in the US because business has still been done in the tradition way where individuals or companies need to have a good track record to be given credit or loans in these countries as a result the risk levels are very minimal. However, the impact would be felt in the real economy as a result of reduced demand for imports.
This is likely to affect international market prices of such products. Banks in the developing economies will likely see their credit lines from foreign banks squeezed and the increasing financial flows that these economies have been experiencing are goin to dry up.
There is global slow down in economic growth.Reduced demand has led to price deflections in other countries.

Similar Threads
Thread	Thread Starter	Forum	Replies	Last Post
development of pakistan press since 1947	Janeeta	Journalism & Mass Communication	15	Tuesday, May 05, 2020 03:04 AM
The coming trade war and global depression	sibgakhan	Current Affairs	5	Tuesday, February 11, 2014 02:30 PM
International Monetary Fund (IMF).	Faraz_1984	Economics	0	Thursday, May 15, 2008 12:27 PM
The Globalization of World Politics: Revision guide 3eBaylis & Smith:	hellowahab	International Relations	0	Wednesday, October 17, 2007 03:13 PM

The Following User Says Thank You to The Star For This Useful Post:
Raz (Wednesday, February 18, 2009)