Origins and Consequences of the Global Financial Crisis of 2008-2009 Essay Example

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    Undergraduate
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Origins and Consequences of the Global Financial Crisis of 2008-2009

Lewis P 2008 “The Global Financial Crisis 2007-2008: Origins, nature and Consequences,” Birmingham Business School, University of Birmingham, UK.

According to Lewis (2008) the GFC caused extreme financial distress to institutions. The financial crash occurred due to high liquidity that was caused by more lending of credit to consumers and financial institutions across the world. Borrowers accessed unsecured debts and failed to service them as expected causing liquidity. Lewis (2008) argues that as much as the occurrence of GFC is blamed on reckless borrowing, irresponsible lending contributed a lot to the crisis. People got accurate information concerning their future incomes and used the opportunity to optimize their borrowing. Thus, according to the author, the origins of GFC should be blamed on the structures and strategies used to determine credit supply. The Crisis has adverse effects on the economy of United States.

Nanto D K 2009 “The global financial crisis: Analysis and policy implications,” Diane Publishing.

The GFC began in the U.S. as a burst of housing market bubble and increase in foreclosures. During the period, most vulnerable banks, insurance companies and investment houses were declared bankrupt. In 2008, there was freezing in credit flows accompanied by loss of confidence in lender. Economies in different countries were driven into recession. Through their support, the International Monetary Fund (IMF) helped many countries to reduce the effects of crisis. It did this by avoiding bans runs and currency overshooting. The IMF support to various countries to save them from the crisis.

Mule S 2008 “Australia and the Global Financial Crisis”, Economics and Finance.

The existence of Global financial crisis (GFC) affected the economy of Australia in various ways. There was increase in inflation which made interest rates to rise and slowdown in economic development. The Federal Government took the initiative to guarantee deposits in banks in Australia, credit unions and building societies. During the GFC, the net foreign debt for Australia was more than $500 billion which was equivalent to over 50% of Australia’s annual gross domestic product (GDP). In response to adverse effect of the GFC, the Federal Government comprehensively guaranteed all retail deposits commencing from 2008 and it ran for three years. Also, the government introduced a guarantee scheme for wholesale borrowing from banks to improve the competitive position of Australian banks for funding.

Kato K 2009 “The IMF’s Response to the Global Crisis”, International Monetary Fund.

Kato 2009 admits that GFC was a challenge to all countries across the world. The crisis has great impact on the region and world at large and consequently affected the work of IMF. When the crisis occurred, the IMF acted on many perspectives to by offering support to its member states. In particular, the IMF offered advice to countries that were adversely affected concerning policy issues. It also respondent positively to the needs of its members states and most importantly modernized its operations of lending.

Carmassi J, Gros D & Micossi S 2009 “The Global Financial Crisis: Causes and Cures*,” JCMS: Journal of Common Market Studies, 47(5), pp.977-996.

According to Carmassi, Gros & Micossi (2009) the origin of GFC can be understood in historical perspectives. There are three main factors observed previous financial crises. The financial crisis that took place between 2008 and 2009 can be linked to these ingredients. The first one is high liquidity in capital markets around the world. The second is credit boom that cause unsustainable leverage and the last ingredient is financial innovation. In order to increase financial and economic stability, the U.S. government used monetary policy and regulatory system to facilitate and promote more leverage as well as maturity transformation by United States and European banks.

Rudd K 2009 “The global financial crisis,” Monthly, The (Feb 2009), 20.

According this article, GFC was caused by sophisticated financial innovations, low interest rates, speculation, subprime loans, excessive executive compensations and changes in computer technologies. The GFC affected very many aspects of the economy and the globalization process. In particular, it led to increase in unemployment, decline in manufacturing, foreclosures and the whole economic experienced a decline. In response to the crisis, the U.S. stated to nationalize financial sector and other components of the manufacturing sector. In addition, the Federal Reserve in the U.S. introduced a monetary policy called quantitative easing meant to help reduce the level of unemployment and improve economic growth.

Nanto D K 2009 “Global Financial Crisis: Foreign and Trade Policy Effects,” DIANE Publishing.

Nanto (2009) indicates that the GFC which emerged from industrialized countries spread to new markets and countries that were developing. Investors withdrew capital from countries causing decline in both domestic currencies and value stocks. A drop in commodity prices and exports further pushed economies into recession and slowed economic growth. The strategies the U.S. employed during the crisis were meant to regain financial confidence in institutions of finance, reduce economic losses and to instill economic growth. The IMF offered assistance to countries in form of financial packages and technical assistance during the financial crisis.

Buti M 2009 “Economic Crisis in Europe: Causes, Consequences and Responsibilities,” European Communities, Luxembourg, ISBN 978-92-79-11368-0.

The GFC was caused by a burst in the property bubble in the U.S. and provision of wrong financial information of different financial institutions across the globe. The effects spread in other countries that are developed and developing ones. In addition, macroeconomic factors and developments in the operations of the financial markets brought about excessive leveraged causing GFC. The financial crisis had great impact on the economy and led to decline in credit supply and also affected asset valuations. In response to the financial crisis, the governments of member states of the European Union (EU) worked together to handle the crisis. For instance, they developed rescue strategies for their respective banking sectors to enhance financial stability credit flows.

Cardoso F H 2009 “The global financial crisis: development and consequences,”

According to Cardoso (2009) the impact of GFC of 2008-2009 was heavily felt by economies of countries integrated in the international market. Financial deficit was the main trigger of the 2008 financial crisis which was brought about increase in mortgages in form of loans meant to help American families to buy houses. The effect eventually spread to the entire financial system both locally and globally. Financial collapse created huge loss in respect to international wealth. In response to the economic situation, the U.S. government used over $180 billion to secure AIG from insolvency and also initiated other programs to restore economic development.

Kennedy S 2009 “Australia’s response to the global financial crisis,” In Australia Israel Leadership Forum, June (Vol. 24).

The GFC had great impact on the economy in Australia from September 2008 and led to the collapse of Lehman Brothers due to bankruptcy. According to Kennedy (2009) the financial crisis began from Australia and spread to Europe and the rest of the world economies. In Australia, there was a decline in consumption and consumer confidence. The first response to the financial crisis was for the Reserve Bank of Australia (RBA) to reduce the interest rates. In addition, the government of Australia guaranteed all Australians bank deposits. The wholesale funding of banks in Australia was done at a fee. The government also introduced fiscal package in consumption and housing sectors to promote economic growth.

Access Economics 2008 “The impact of the global financial crisis on social services in Australia,” Canberra.

A fall in the price in the houses in the houses and a rise in the interest rates made the least creditworthy borrowers to default servicing their loans. This brought about huge losses to investors who had put their money in mortgage-backed securities. This led loss of trust in counterparties affecting the effective functioning of credit markets. The GFC led to a reduction in the value of Australian stock market by almost 40%. There was a significant reduction in commodity prices which is the main source of Australia’s income. In response to the economic deterioration, the Federal Government provided $10.4 billion to reinforce demand.

Taylor J 2009 “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong”, Working Paper 14631, January, National Bureau of Economic Research.

Mohan (2009) asserts that the GFC was caused by the sub-prime mortgage industry in the U.S. In another perspective, the crisis thought to have occurred due to persistence of global imbalances which were the outcome loose monetary policy that was experienced in more developed economies. The effect of the crisis was felt in the U.S. and other countries across the world in form of economic slowdown accompanied by decline in economic inflows. Thus, the Federal governments were forced to sterilize the impact of liquidity by increasing the cash reserve ratio as well as issuances through fiscal policies.

Reference List

Access Economics 2008 “The impact of the global financial crisis on social services in Australia,” Canberra.

Buti M 2009 “Economic Crisis in Europe: Causes, Consequences and Responsibilities,” European Communities, Luxembourg, ISBN 978-92-79-11368-0.

Cardoso F H 2009 “The global financial crisis: development and consequences,”

Carmassi J, Gros D & Micossi S 2009 “The Global Financial Crisis: Causes and Cures*,” JCMS: Journal of Common Market Studies, 47(5), pp.977-996.

Kato K 2009 “The IMF’s Response to the Global Crisis”, International Monetary Fund.

Kennedy S 2009 “Australia’s response to the global financial crisis,” In Australia Israel Leadership Forum, June (Vol. 24).

Lewis P 2008 “The Global Financial Crisis 2007-2008: Origins, nature and Consequences,” Birmingham Business School, University of Birmingham, UK.

Mule S 2008 “Australia and the Global Financial Crisis”, Economics and Finance.

Nanto D K 2009 “Global Financial Crisis: Foreign and Trade Policy Effects,” DIANE Publishing.

Nanto D K 2009 “The global financial crisis: Analysis and policy implications,” Diane Publishing.

Rudd K 2009 “The global financial crisis,” Monthly, The, (Feb 2009), 20.

Taylor J 2009 “The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong”, Working Paper 14631, January, National Bureau of Economic Research.