Structural Cause Of Global Financial Crisis - MyAssignmenthelp.com

Question: Discuss about the Structural Cause Of Global Financial Crisis. Answer: Introduction The purpose of this task is to provide a brief overview about the cause and impact of the Global Financial Crisis which occurred in the year 2008. The economic crisis adversely impacted the state of many nations due to which their economic growth became unstable. Further more details about the task are discussed below: Significance of Global Financial Crisis (2008) The financial crisis of 2007-2008 is also commonly known as global financial crisis. This crisis occurred in the year 2007 in the subprime mortgage market of US, this market was fully blown out with the collapse of Lehman Brothers investment bank. Further many reason were concluded for the occurrence of this event like, the US Senates Levin-Coburn Report said that this event happened because of high risk, complex financial product; secrecy in conflicts over interests and lastly the failure of regulatory bodies to regulate the activities accordingly (Scott, 2010). The Financial Crisis Inquiry commission said that the crisis was avoidable and it was a cause of failure of financial bodies in regulating and supervising the market. But the most significant reason of the subprime mortgage crisis was the imbalance in international and increase in household loan and real estate bubble as well. Further it shall be noted that many factor collectively affected the growth of the subprime mortgag e market in US and resulted in bursting out of the whole event (Crotty, 2009). The Community Reinvestment Act (CRA), a law defined by the US government assisted the low and moderate income people to get mortgage loans. Resulting to which, many subprime loans were bundled together and sold to common people to help them. Thus, this type of ending initiated by banks and government led the government to face a glut of risky lending. Further the lax regulations also led to negligence of many acts initiated in the environment. Subsequently all these activities combined to result in the financial crisis worldwide. This crisis is regarded as the worst crisis after Great Depression of 1930 (Shiller, 2012). Source: (https://www.globalissues.org/article/768/global-financial-crisis) Examples of financial and economic crisis worldwide Not as big and devastating as Financial Crisis of 2007-2008, but there were many of economic crisis which poorly affected the state of many countries. Some of them are discussed below: Irish banking Crisis of 2008: The post 2008 Irish Banking Crisis was a crisis which was occurred because of Great Recession. Many financial institutions faced insolvency after the occurrence of great depression worldwide. The Irish government in this respect activated 64 billion euro bank bailout which further led to a number of revelations about business person and banks affairs. This ultimately added to the deepening of the recession in the country. The case in the Irish banking is similar to the global financial crisis of 2007-2008. The government and the banking regulation gave ease to the people ad organizations to borrow loan from them and the lax supervision increased the credit concentration risk (Lane, 2011). Thus it shall be noted that the organization faced this financial crisis because of the irregularities in their baking system along with increasing demand of loan in the market. Increase in property price in the country Ireland showed that the economy is overheating and will result in burst out soon. Basel framework also showed the growth and the loss of the country in certain areas. The pillar one of framework explained the growth in bonding funding and strong capital adequacy ratio as well. And the pillar two explained the supervisory process of the country. Further the banking regulation and lax supervision act as a major threat for the whole nation and the cause of crisis as well (rba, 2009). Increase in real public debt since 2007 Source: (https://trueeconomics.blogspot.in/2011/03/) 201516 Chinese stock market turbulence: The Chinese stock market started with the popping of the stock market bubble in 2015 which ended in 2016. A-shares listed in the Shanghai stock market were lost within a short span of one month. Later within 3 week the stock markets of the country fell by 30 per cent as more than 1400 listed companies filed trading halt so as to overcome the loss faced earlier and prevent themselves from future losses as well (Hong, 2016). Later in the IMF (International Monetary Fund) annual meeting it was stated that turbulence in the stock market of China can trigger the new financial crisis worldwide. Further it shall be noted that Chinas stock market is one of the highest performing stock market worldwide but the country faced such turbulence because of aggressive trading at the stock market. The shares listed at the stock market were heavily overvalued in the previous weeks due to which the value of stock market also rose. Soon after which the bullish mar ket of the company turned in bearish as the traders started selling unsustainable stocks due to which the market became frothy. Resulting to which the economy of the country dropped because it was mainly based on the Shanghai stock market only (Pu, Rongbing, 2009). Possible cause of financial crisis Many factors can be linked to the global financial crisis and its effects in the market. Some of these causes are discussed below: Increase in keeping private debt level: In order to conquer the stock market crash and increase the economic value, the Federal Reserve eased the credit availability and reduced the interest rates down to the level which was not expected. The low interest rates on credit increased the debt ratio in the economy, among which most of the debts were obtained by people in order to produce household property (Claessens, et. al., 2010). Resulting to which as the people acquired debts to purchase houses due to which subsequently the prices of property increased along with increase in the stock market as well. Later unemployment and less income in hand of people to pay off the mortgage made it difficult for people to pay off debts due to which the property market rose along with crash in banking along with stock market (Rudd, 2009). Lack of transparency and independence in financial modeling: Another cause of Global Financial Crisis can be the lack of transparency and incompetency of the government to initiate the model in the market. The models used by the financial system of the countries were not effective enough to lift up the economy due to which it poorly affected the state of the countries. Less transparency further resulted in increase in complexity of the system. The credit rating agencies and the bank regulators both relied on the accountability and authenticity of the model to perform in the environment but negative effects were shown in the environment (Surez-Lled, 2011). Government lax supervision: It shall be regarded as the biggest cause of the global financial crisis which occurred in the year 2007-2008. As the governments of the countries ignored the activities implemented in the environment by the banking regulations and stock market. Due to which the crisis occurred. Apart from this, it shall be noted that the government always kept the regulation loose due to which the credit risk in the country increased. Thus, lenient regulations of the government can be regarded as a cause of the crisis (Cheung, Fung, Tsai, 2010). Source: (https://static.treasury.gov.au/uploads/sites/1/2017/06/Tas_Economic_Forum-5.jpeg) Chances of occurrence of GFC in future There are possibilities that the crisis might repeat itself because of activities initiated by the government and the market as well. The government policies are encouraging the granting of mortgages to non-credit worthy homebuyers. As mentioned above, it was one of the biggest causes due to which financial crisis occurred worldwide and still the government is initiating similar activities in the market. Apart from that lack of transparency in the market makes it difficult for the regulatory bodies to understand the depth of the issue due to which such processes rotten the environment resulting in crisis worldwide (Fidrmuc, Korhonen, 2010). Scale and impact of GFC in different countries The countries worldwide were highly impacted with the global financial crisis. The below-mentioned are some of the countries which were affected by the global financial crisis. Nepal The financial crisis in Nepal affected in such a way that it reduced the global output by 0.75per cent. The commercial banks were poorly troubled as the effect of this economy. As the country Nepal has largely insulated from the toxic assets of big investments due to which the economy of the country was indirectly affected resulting in decrease in revenue of the government (Christian, 2009). Global slowdown and recession was attracted by the Western economies, this also affected the Nepali services industry which was contributing 50.9 per cent to the GDP. Travel plans of the tourist were canceled; corporate donors limited the amount of donations in the country and manufacturing sector also suffered due to the reduction export quantity. Thus, these were the major impacts of GFC in Nepal. Source: (rba, 2009) Australia The financial system of the country faced a shock after the global financial crisis as the banks of the country has solid profits till the last year but with the occurrence of this crisis all the reserves of the country vanished. Just like many other countries fall in the property and share market abruptly declined the personal wealth of native of Australia. Due to which subsequently the deficits and loans increased in the country which destructed the capitals of many renowned banks as well. Subsequently external trade started reduced which resulted in unemployment less export as well. The gross domestic product reduced and unemployment increased (Chang, et. al., 2013). Actual and proposed reforms taken for the global financial crisis The following are the reforms which are and shall be initiated worldwide: Adoption of Basel III capital requirements: This process will help the governments to control the globally systemically important financial institutions. This has implemented strict regulations on the market. Liquidity regulation: the governments have levied regulation in the liquidity management. It reduced the flow of cash in environment as the banks started holding more liquid cash to meet the requirement of repo transaction (Davis, 2018). Proper credit rating: Adequate credit rating was initiated so as to accurately know about the value of the stock which the investor is going to purchase. Apart from that protection of the interest of the investor was also managed through various governmental measures. Conclusion and Recommendation Thus in the limelight of above mentioned events the fact that shall be noted that Global Financial crisis is one of the biggest financial crisis of all time which hampered the economic growth of many countries. The task discusses about the crisis and its causes due to which it occurred. There are many reasons of this crisis which shall not be repeated again to avoid occurrence of this event again. The report adequately discusses about the requirements of the task. The following shall be recommended to the governments so as to cure themselves from such event of crisis: The credit rating agencies shall adequately rate the shares and companies in the market. According to the authentic rating only people invest in the shares of the companies. This will increase the authenticity of the organizations due to which fraudery in the stock market will reduce. The government shall maintain control on the property and stock market, as these are the two major areas which were affected so the government shall control the activities happening in these areas. References Chang, S. S., Stuckler, D., Yip, P., Gunnell, D. (2013). Impact of 2008 global economic crisis on suicide: time trend study in 54 countries.Bmj,347, f5239. Cheung, W., Fung, S., Tsai, S. C. (2010). Global capital market interdependence and spillover effect of credit risk: evidence from the 20072009 global financial crisis.Applied Financial Economics,20(1-2), 85-103. Christian, P. (2009). Impact of the Economic Crisis and Increase in Food Prices on Child Mortality: Exploring Nutritional Pathways.The Journal of Nutrition,140(1), 177S-181S. Claessens, S., DellAriccia, G., Igan, D., Laeven, L. (2010). 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