Effect of Global Financial Crisis System †MyAssignmenthelp.com

Question: Discuss about the Effect of Global Financial Crisis. Answer: Introduction The current global scenario is witnessing the extensive impact of globalization in every sector. Positive implications of the globalization are known to all while majority of the negative implications are being overlooked. Emergence of the global financial crisis is one of the most well known negative implications of globalization (De Nicolo Juvenal, 2014). There are various global financial crises being emerged in the recent time with the 2008 American crisis is one of the major and infamous one. There are various opinions being given by different authors regarding the causes, output, and result of the global financial crisis. Moreover, the global response towards the financial crisis is also different and diverse in nature management. This report will discuss about the causes and reasons of emergence of the global financial crisis along with the result and implications of it. Moreover, the response towards it will also be discussed and critically evaluated in this essay. One of the key reasons of the global financial crisis is the origination of the liquidity crisis among the top banking institutions in the United States. This was first in the 2007 and it caused due to the fact the prior to 2007, American banks have provided huge amount of loans in the market, which further made the way to the creation of the new money in the system. In the late 2007, investors withdrew their investments from the market, which forced US Federal bank to increase the flow of capital in the system (Haas Lelyveld, 2014). The situation further worsened with the crash in the stock markets around the world. Thus, the source of having new investments goy closed causing the financial crisis. Moreover, with the initiation of the globalization, the economy of one country depends on another. Thus, crashing of the stock market of America caused in the crash of stock markets in some major economies. This amplified the all American situation in to a global phenomenon. Collapse of the American real estate market Another important reason for the occurrence of the global financial crisis is the bursting of the bubble of the housing market in the United States. Post investigation of the global financial crisis revealed that people are being given huge housing loans by the America banks extensively. At some point of time, it was concluded that the borrowers are unable to repay the loans. This led the banks to take the mortgage of the properties. However, the mass occurrence of the defaulting loans caused the entire collapse of the housing market, which made difficult for the banks to recover the value from the properties (Walks, 2014). Thus, the banks went in to cash crunch and liquidity crisis. This situation also triggered the occurrence of the financial crisis in the American market and then in the global scenario. American banks are having major economical influence in the global economy and they are one of the biggest lenders in the global economy management. Thus, credit crunch with them c aused negative impact in the global economy as well. Another prime cause of emergence of the global financial crisis is the wrong and hypothetical ratings being provided by the top rating agencies such as Standard Poors and Fitch. This is due to the reason that, these agencies had rated the subprime securities for investment, which further attracted more investors. However, it was a wrong speculation from their point of view and proved fatal in the further stage. The huge amount of investments being done on these subprime securities caused the impact of the crisis to get multiplied (Alsakka AP Gwilym, 2013). Thus, wrong ratings and speculations from these leading agencies caused the occurrence of the financial crisis in the global scenario. Impact of the global financial crisis Global financial crisis is having different impacts on the financial market, society and national economy. The following sections will discuss about those. One of the most suffered areas from the global financial crisis is the national economy of the United States. This is due to the reason that, according to the reports, the growth rate of the economy of the United States declined steeply and costs a holistic loss of USD 648 billion. Thus, this reflected in the per capita income of the average American households. The average income got reduced due to the financial crisis (Chen et al., 2016). As discussed in the earlier section that collapse of the real estate market of the United States is one of the key reasons for the global financial crisis. Thus, the American real estate market got hit hard and caused a loss of USD 3.4 trillion just in one year between 2008 and 2009. This also caused negative impact on the national economy of the country. Stock market of the United States also crashed due to the financial crisis. This was happened due to the reason that, investors were not felt safe to have their investment in the stock market. Instead of that, they started to withdraw their capital from the stock market (Dimitriou, Kenourgios Simos, 2013). It lead to the crash of the American stock market and it was being estimated that a loss of USD 7.4 trillion faced by the stock market. In terms of the social impact of the global financial crisis, it was estimated that the rate of the unemployment in different countries got increased due to the loss of the jobs by the professional. Loss of jobs caused due to the reason that, with having less demand in the market, business organizations were facing challenges to earn their revenue and thus they went for mass attrition in order to reduce the cost of operation. It was estimated that only in the market of the United States alone, 5.5 million jobs were cut. Hence, the social structure got hampered due to the increase in the rate of unemployment (Chang et al., 2013). As per the information of International Labor Organization, approximately 20 million jobs were cut in the global scenario. In terms of the sales and revenue, business organizations operating in the global market faced the difficulties to maintain their global operation. This was due to the reason that, with the increase in the rate of the unemployment and lack of liquidity in the market caused the reduction in the purchasing power of the customers (Bachmann, Elstner Sims, 2013). Thus, customers were also reduced their average consumptions of different products. This phenomenon worked in cyclical manner due to the reason that, the more was the rate of unemployment, the less was the expenditure of the consumers. On the other hand, the less was the expenditure from the consumers, the more was the cost reduction policies of the business organizations such as employee attrition. Global financial crisis also had negative impact on the banking sector also. Banks especially the American banks went for bankruptcy (Claessens Van Horen, 2015). For instance, Lehman Brothers filed for bankruptcy. The entire banking system got crashed in the process with having less liquidity in the system. The gross domestic production of the United States along with some other major economies got reduced. This was caused due to the reason that, with having less demand in the market, there are various business organizations closed their facilities, which reduced the production rate (Ollivaud Turner, 2015). However, apart from only having the negative implication of the global financial crisis, there are few positive sides also. One of the major positive implications is the reduction in the rate of emission of pollutants. It was estimated that the average rate of emission got reduced (Najam, Runnalls Halle, 2016). This was mainly caused due to the closure of many facilities and stagnant condition of the entire global economy. Global responses to the financial crisis International Monetary Fund went for creating an extra fund in order to lend more to the countries, which were worst affected by the financial crisis. Moreover, the borrowing agreements of International Monetary Fund with its member countries were being increased in order to borrow more amount of fund, which was used in lending to the collapsed economies. Various governments such as government of the United States and Australia introduced financial stimulus in the economy in order to boost the system and to provide financial cushion to the organizations, which are on the verge of bankruptcy (Bordo Haubrich, 2017). In 2008, government of Australia announced as financial package of AUD 10.4 billion to the domestic populations in order to increase their purchasing power and to increase the demand in the market (Xu et al., 2013). Stimulus steps taken by the government of the United States include providing tax credit to the first time buyers of homes. This was done in order to regain the demand in the collapsed housing market. Central banks in different countries increased the rate of the guaranteed savings in the banks for the depositors. This was done in order to motivate people to invest more in the banking sector, which will lead to the increase in the flow of capital in the banking system (Bruno Shin, 2015). Developing countries such as India and China were less impacted from the global financial crisis. However, they have also initiated different monetary and fiscal policies in order to prevent the rate of depreciation of their currency (Bekiros, 2014). Government of India increased the rate of public expenditure in order to maintain the flow of the capital in the system. Moreover, the rate of interest rate for exporters was also slashed in order to increase the rate of exports from the country. Excise duty was also cut by the government in order to increase the demand in the market by reducing the price. Though this caused loss to the government in terms of tax collection, but it helped to maintain the steady demand in the system. Conclusion Therefore, from the above discussion, it can be concluded that global financial crisis is one of the major incidents being happened in the recent time and had impact globally. The global impact of the financial crisis was further amplified due to the initiation of the globalization. This caused in increasing in the dependency between the countries. Negative occurrence in one economy badly impacted another economy. This report discussed about the reasons for the occurrence of the financial crisis along with its impact and the responses to counter it. This report also concludes that global banking system was changed drastically after the financial crisis and was made more immune in case of any future mishaps. It is also discussed in this report that, the key reasons of the financial crisis lied in the ineffective policies of the United States. 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