3307AFE International Economics For Global Financial Crisis

Causes and Consequences of Global Economic Crisis 

Notably, the global economic crisis is commonly referred to global financial crisis. In the United states, the liquidity crisis engineered by mortgages resulted into more capital being pumped into the economy by the federal bank in 2007.However, global stock markets crashed worsening the financial capital market (Justine, 2014)In addition, contraction of the United States housing market contributed to the financial crisis.Further,collapse of large financial institutions like the Lehman Brothers due to the contraction of the global housing and stock markets.

Primarily, the withdrawal of foreign mortgage security investors from the United States like the French Bank lead to a serious business confidence in world largest economies hence fueling the crisis (Edley, 2009).Erosion of investor confidence weakened financial providers thus furthering a gap in the world credit market hence the crisis. Notably, the collapse of the United States Investment Bank propelled the crisis further leading to nationalization of mortgage agencies.

Further, risky banking activities by large global financial institutions fuelled the crisis. Notably, purchase of securities from fellow banks, securitization of loans through mortgages, collateral debt obligations and borrowing loans from other banks to lend to its market share and offering more credit facilities (Anup,2013)These activities made the banking system more vulnerable to the unstable global conditions hence making the effects worse off when the financial crisis finally came down.

The global crisis was characterized by instability in the financial assets, funding accessibility and sustainability of the financial system. Notably, there was contraction of the world output per capita by 1.8% in the year 2009.In addition, global markets underwent asset and credit instabilities, wealth erosion and bankruptcy spells. Primarily, Asset prices can result into a crisis. Notably, the 30% increase in the prices of housing facilities in Spain, Ireland and other global markets thirty years preceding the crisis having being propelled by rapid price increases.

 Further, fast expansion rate of credit facilities contributed to the financial crisis. Specifically, the coverage credit values in the United Kingdom, Spain and Iceland propelled real estate investments.Subsequently,debt servicing rates become higher because of the increase in credit customers and their financers eventually affecting the credit standards. Lending leverage attributed to less oversight measures made vulnerability of household to stagnate thus stiffer lending conditions and slow economic growth rate.

Consequently, there was high number of credit defaulters globally hence the crisis. Inability to pay loans in time in the long run leads to bankruptcy of financial institutions country wise and globally. Marginal loans and risks exist in an economically sound economy.However,with the easily available credit facilities for all borrowers, servicing of debts and repayments rates were highly vulnerable,Also,financial structure liability of risks contributed to vulnerabilities which weren’t predicted correctly in time hence the unforeseen crisis.(c,2012)

Similarly, low interest rates in the world major economies. In addition, yields from bonds were equally low despite price rises in the year 2004.Notably,low interest rates and bond yield were attributed to stronger demand by the investors thus pushing the rates lower. This was attributed to inadequate legislation by government of some of the world largest economies.Also,borrowing of credit facilities by European countries in the United States of America financial sphere are partly responsible for the global crisis.

According to the Economist, low inflation and stabilized economic rates blindfolded the risk detection which could have otherwise help avert the crisis through proper and credible predictions.Moreover,sub-prime housing loans and mortgages is conserved reckless and a facilitator of the overall financial crisis.Largely,This was attributed to the inability to pay back credit by persons with low credit worthiness and banks that converted them into large quantities through securities which they considered low risk.

Specifically, failure of monetary authority like the Central bank to regulate and oversee activities of banking institutions is blamed for the crisis. Failure to contain and mitigate the effects of the account imbalance and the housing sector unstable economic conditions. Notably, there were substantial current account imbalances in most European economies preceding the crisis.Predominantly,the instability of accounts was triggered by credit facilities supply from the European areas.

 Specifically, the Bank of England lost its supervisory power over financial institutions in England in the year 1997 while the European Central Bank failed to restrain the credit facilities surge with the assumption that it mattered not as regards its monetary union. (The Economist, 2013)Notably, the banks ought to have lowered loan value rates for mortgages or insisted on banks to implement capital reserves in their respective institutions. Lack of proper regulatory and oversight activities by central banks created and further fuelled the crisis.

Consequence of the Global Financial Crisis

Economic trading confidence was eroded with the global financial crisis.Notably,banks refrained from extending credit.Generally,macroeconomic conditions have slowed down.Evidently,this is characterized by high pricing of goods and services, contraction of trade volumes globally due to reduced global finances and activity, contraction of industrial outcomes. Notably, In Australia, employment levels have gone up, increased total income due to the its labor market(Ellis,)Also, the Australian banking system has made substantial profits unlike other market economies of the world .

Further, The Australian Government incorporated a budget to mitigate the effects of inflation caused by the crisis.Notably,bank deposits were guaranteed by the government through a $10.4b package.Specifically,the package benefitted carers,senior citizens and families. Furthermore, House buyer grant of $14,000 for current houses and %20000 for new home owners.Also,the automotive sector received financial incentives and grants.Also,a second stimulus budget was read in 2009 allocating financial boosts for education,housing,infrastructure and tax breaks.

Subsequently, low gross domestic product of most of the world largest economies are equally low after the economic crisis. Notably, European countries are mitigating effects of the euro crisis (The Economist, 2013) Notably, reduced export volumes were recorded by 4.1% from 9.3% are some of the effects of the crisis. Further, investment capital is scarcely available and higher interest rates for credit borrowing countries due to the instability of finances in the global market (Lin, 2008)Also, decreased demand for goods that are manufactured because of slow growth.

 Generally, less developed countries were adversely affected by the crisis as compared to advanced economies simply because the former has few resources to mitigate the effects of the crisis.Naturally,per capita incomes in most economies reduced, significant account deficits in trade balances, devaluation of various currencies, budget deficits and high inflationary figures(Gurtner,2010)Further, foreign workers had their salaries disapportioned due to the account deficits of most economies in the world.

Consequently, decreased living conditions were experienced by most of the global population.Similarly,unemployment levels rose significantly following loss of jobs in the housing, banking and other sectors of the economy attributed to the financial meltdown(Gurtner,2010)Moreover, social unrest has been experienced in some countries with poverty levels rising as an aftermath of the crisis.Further,the capital flows have significantly changed in most countries due to the unstable financial market.

Further, few credit advancements and credit withdrawals have been made to developing countries following the financial meltdown. Also, developed countries have recorded substantial capital drain.(Gurtner,2010)Moreover, remittances by foreigners to their respective government declined due to repatriation and limited or declined foreign labor market force.Usually,the number of working migrants in developed countries are high but following the crisis there s a significant drop. Also, Japan slow rate credit was withdrawn in the year 2009.

Country Capital drain (USD$)

Monetary and Fiscal Policy

Predominantly, monetary policies have a direct impact on demand and supply whereas fiscal policies focuses on government expenditure and taxation. To curb inflation, monetary authorities advocated for low aggregate demand for goods and services while fiscally, higher taxation was implemented to reduce budget deficit for the government.Further,most economies lowered their interest rates to boost investment and encourage expenditure.Further,Quantitative easing has been adopted to boost money supply while stabilizing inflation.

Notably, the international monetary Fund pushed for a fiscal policy to curb the effects of the financial crisis as compared to monetary policies. Predominantly, monetary policies provide stable outcomes and limits countercyclical policies. Primarily, both monetary and fiscal policies have their own limitations. Despite which, there has been significant slow but steady economic growth since their incorporation .Notably ,both policies control inflation and unemployment figures.

Subsequently, after the crisis, world economic growth levels were as low as 4 per cent in the year 2009 According to the International monetary Fund in the G7 economies. Some economies increased their loan interest rates to avoid further depreciation of the currency and also controlling the capital flow (Lin, 2008)Notably, the European central bank offered unlimited liquidity to its banks in a bid to stabilize its banking system, through an overnight policy rate.(Stark,2009)Further, credit frontloading operations were extended.

Further ,to control inflationary rates, the European Central Bank introduced a policy rate of 1 per cent with the aim of encouraging borrowing of credit facilities and encouraging investment opportunities.Also,tenders were allotted with fixed rates in liquidity based operations in the financial sector hence it enabled banks to easily access financial assistance and cheaply too(Stark,2009) Also, covered bonds were made available to banking sector for refinancing purposes.

Fiscal policies were dominated by drop in taxes and enormous government expenditure initiated by huge bailout of collapsed or bankrupt financial facilities. Particularly, the central bank lowered its rates to encourage more borrowing. Expansionary fiscal policy encouraged substantial expenditure by the government to encourage creation of more employment opportunities and boost production levels(Federal reserve bank ofst.louis,2011)Further, a stimulus package of %787billion inclusive of tax incentives.Also,quantititave easing was implemented.

Effectiveness of Monetary and Fiscal Policies after the Global Financial Crisis 

Significantly, monetary and fiscal policies have restored investor confidence, stabilized inflation rates in some economies and upsurge monetary authorities accountabilities. Consequently, monetary and fiscal policies were incorporated to mitigate the effects of the global financial crisis. Notably the G2O held three meetings to come up with solutions to the effects of the economic recession. Primarily, expansive monetary and fiscal policies were implemented. Noteworthy, The European central bank has lowered its basis point by 325 points since 2008Similarly its rate of interest is the lowest in its history at 1.0 per cent. Further, and implementation of non-standard liquidity activities has been established to boost liquidity.

Also, liquidity is has been availed to banking institutions through full rate allotment that is fixed to boost individual bank liquidity thus banks are able to keep offering credit.Moreover,liquidity maturity period has been elongated from six months to a year. Credit facilities have been extended to banks by the government as a consequence of the European 2008 action plan (Stark, 2008) Notably, the banks are guaranteed lending between banks themselves, increased retail insurance deposit, relief schemes for assets and recapitalization.

Notably, the effect of government injecting 23 per cent of it gross domestic product to the financial industry is expected to raise the gross domestic product.

Arguably, the implemented monetary and fiscal policies have made significant positive macroeconomic progress in trying to revive growing and stable economic growth in most advanced and developing countries .However this hasn’t been without its challenges due to the various limitation factors for the policies.Averagely,significant progress has been recorded because of the implementation of these expansionary monetary and fiscal policies however long term or short term, progress is progress.

Limitations of Monetary and Fiscal Policies

Notably, monetary and fiscal policies evidently help curb effects of the financial crisis to an extent. However, not all these measures are able to solve the financial crisis permanently.Primarily,In the United States of America, rising of core inflation rate after the application of consecutive monetary and fiscal policies is proof enough of the inadequacy of the two types of policies(Martin,n.d.)However, monetary policy has the capacity to contain inflation by maintaining stable inflation rates. Also, fiscal policy stabilizes employment and growth rate levels in cases of low aggregate demand for product and services.

Predominantly, Fiscal and monetary policies are counter cyclical hence making their economic impact less permanent.Notably,this was evidenced by the great moderation I the United States between the years of1985 and 2007.In addition, monetary policies are incapable of maintaining stable economic growth rate and unemployment. Fiscal policy like tax cuts is likely to foster higher economic growth rate immediately after enactment. However, in the long run, with low expenditure translates to small economic growth rates.

Fiscal policy is curtailed by timing due to their dependence on taxation variations and expenditure by the public. Time difference between the formulation of the policy and when the impacts are in place has a huge bearing on the effectiveness of the fiscal policy measure. Also, the time interval as to when action is required and when it is recognized is crucial to the effectiveness of fiscal measures (Pragyendeepa, n.d.)Administrative delays also affect the effectiveness of fiscal policies. Specifically; sanctions from arms of government can frustrate fiscal policies from being implemented because of rules and procedure codes.

Future uncertainties on economic instabilities render several fiscal policies ineffective. Incorrect predictions on revenue to be raised, incurred expenditure, balances of the framed budgets encourages poor planning hence the difficulty to predict and plan curbing measures.Also,fiscal selectivity may have desirable or undesirable effect thus its ineffectiveness. Further, the enaction of inadequate fiscal policies will most likely not solve the problem within which it was intended to.

Consequently, income redistribution favoring low income earners will likely increase demand. However, if there’s additional income available to persons with higher propensity marginally to save thus contractionary (Pryandeepa, n.d.)Also, stringent taxation measures are likely to be high in turn affecting working incentives thereby sidelining the purpose of fiscal policy and promoting high unemployment rates. In addition, reduction of national income is fuelled by deficit budget as a result of small government income.

Monetary policy implies measures by monetary authority to control money supply in a bid to stabilize employment, inflation and deflation and general growth of the economy. However, a monetary policy is not a suitable for less developed markets due to low money market availability in most developing countries (Pranyendeepa, n. d.)Monetary policies are effective in organized market systems. Moreover; effectiveness of monetary policies is realized in capitalized and well developed entrepreneurial capabilities.

Furthermore, monetary policies are favorable to low inflationary conditions which are highly unlikely in a developing country. Stable inflationary pressures and availability of non-financial systems are the perfect condition for most monetary policies to fulfill their objective. Also, accountability and compulsive monetary policies are less than likely able to fulfill the objective for which they were intended because of the persuasive and infantry experience available in developing countries.

Conclusion

Undoubtedly, the global financial crisis had adverse effects on the general world economy characterized by high inflationary figures, low per capita income, low gross domestic product, instability in the financial market, high unemployment among other vices .However, various governments have implored expansionary monetary policies and fiscal policies to help mitigate the economic unfavorability caused by the crisis. Notably, the monetary and fiscal policies have stirred slow macroeconomic growth through government interventions. Arguably, the policies have their shortcoming which nevertheless has improved the economic situation of most global economies.

Further, expansionary monetary and fiscal policies have been able to boost the overall financial status of most of the world most advanced economies as compared to developing countries which have inadequate financial market institutions .Notably, after the global financial crisis most economies implemented monetary and fiscal policies to help restore the stability of their economies. However, not all the negative impacts of the financial economic crisis have been completely erased by the monetary and fiscal policies due to various setbacks.

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