The global financial crisis, which had its roots buried deep
into the prospering U.S and some other European economies, started to show its
effects in the middle of 2007 and into 2008. Around the world, people lost much
of their savings and nearly all industries and governments have felt the effect
of the crisis. Growth rates of many countries have recorded negative values and
had to shed trillions of dollars of their taxpayers’ money in order to recover
from the crisis. The collapse of the irresponsible US mortgage market and the
bursting of the housing boom bubble can be seen as the main and immediate causes for this
financial meltdown. In this essay, I shall discuss the immediate effects of the
blackout and the government responses to the crisis.
When the sub-prime debtors started defaulting on huge scales in the U.S, the stock markets around the world collapsed and the investors started withdrawing their money from the financial system. The value of Collateralized Debt Obligations(CDOs) and their derivatives which were the main instruments of investment in the U.S housing sector and considered to be very safe(most of them had AAA ratings) fell down drastically. Until that point of time investment banks like Morgan Stanley, Lehman Brothers, Goldman Sachs etc. had most of their assets in the form of these CDOs. When their value went down, their asset values decreased tremendously and were on the brink of bankruptcy thereby leading to further instability in the financial markets and crisis.
In times of a financial crisis, the banks lose confidence in
debtors and essentially stop lending money to other banks and commercial
structures transactions—fearing the borrowers would be unable to repay the
loans there by resulting in a freeze of credit in the system. This is a big
problem to many industries and firms in the U.S and Europe since they mainly
depend on short term loans from banks to perform their operations and
transactions and when banks stopped giving these loans, they actually had to
function at huge losses or cease to function.
The crisis spread like wildfire throughout the world. There
have been huge amounts of investments in the U.S financial sector from Europe
and many developing countries. When U.S faced crisis, it was invariably
reflected in the markets back in the investors’ home countries. Also, in countries
like China, there are many industries which have been making huge profits by
exporting their goods to the U.S and other developed countries. So, when the
U.S economy was faced with crisis, the demand for these Chinese goods fell
sharply and the manufacturing units in China were facing huge losses. Exports declined by a record 26 percent in February 2009 and
17.5 percent in January as global demand for Chinese-made toys, shoes, clothes
and other goods collapsed.
The crisis rapidly
developed and spread into a global economic shock, resulting in a number of
European bank failures, rapid declines in various stock markets, and large
reductions in the market value of shares and commodities. According to Bloomberg, $14.5 trillion, or 33%, of the value of the
world’s companies has been wiped out by this crisis at its peak.
Socio-Economic Effects: As the economic situation of the
world collapsed, its effects were seen almost everywhere. Many industries, in
order to reduce their expenditure, cut the number of employees drastically
leading to huge rates of unemployment. Official figures reveal that only in
China, more than 20 million people lost their jobs between 2008 and 2010. U.S
and Europe saw unprecedented levels of unemployment at 12% and 9.5%
simultaneously in 2008. In addition many employees had to suffer from pay cuts and
lower pay scales imposed. Also the job insecurity of the employees has had a
drastic effect on their productivity and efficiency.
Another major problem the economic depression presented is
that of food crisis. Although food prices have been considerably increasing since
2003, the economic crisis greatly magnified this price rise and its effects
which were largely unnoticed until then by the governments. The World Bank
reports that global food prices rose 83% between 2005 and 2008. As of March
2008, average world wheat prices were 130% above their level a year earlier,
soy prices were 87% higher, rice had climbed 74%, and maize was up 31%. Another concurrent issue is that of human rights. Amnesty International in its 2009
report states that “As millions more
slide into poverty as a result of the current crisis, social unrest increases
resulting in more protests. These protests are sometimes met with a lot of
suppression. Other times, people are exploited further.” As
unemployment prevailed, the workers had to forgo their right to minimum wages
and labor welfare measures took a plunge due to gross losses of the industries.
Thus the many various faces of economic crisis were revealed
and governments had to take necessary steps. As soon as the news of the
financial meltdown was confirmed, countries around the world started implementing
countermeasures to minimalize the effects of the crisis. Financial rescue plans
have been implemented and huge stimulus packages injected into the financial
system. The U.S. executed two stimulus packages, totaling nearly
$1 trillion during 2008 and 2009. Bailout packages for many bankrupt
companies have been announced. By 2011 the total amount of bailout packages
amounted to $ 9.7 trillion. However
there has been widespread criticism from various economists and public on the
U.S policy of bailing out the investment banks (Goldman Sachs and Morgan
Stanley) which are widely conceived to be the main culprits behind the economic
crisis. It has to be noted that an initial bailout bill could not pass the US
senate but only after some major changes and repeated appeals from the then President
George. W. Bush and the IMF made up the minds of senators to pass the bill. However,
as former Nobel prize winner for Economics, former Chief Economist of the World
Bank, Joseph Stiglitz, argued,that the
plan “still remains a very bad bill”
Around the world, many other countries have also devised
stimulus packages and bailout packages for their economies. Germany
announced that all the private bank accounts are guaranteed by the government. The
U.K announced a bank rescue package and rescue of about $850 billion on 8th
October 2008. The plan aimed to restore market confidence and help stabilize
the British banking system. China also announced a $586 billion stimulus
package on 9th November 2008 as an attempt to minimize the impact of
economic crisis. Most of these stimulus packages have been aimed at improving
liquidity in the economy and trying to get banks give out loans thereby
stabilizing the industries and the economy. For example the British government,
by its stimulus packages provides money to banks but only to be used for
extending credit. On 18 February 2009, U.S. President Barack Obama announced a
$73 billion program to help up to nine million homeowners avoid foreclosure of
their homes. Many economists argue that this step should have been the first to
be taken since this directly addresses the cause due to which recession
started.
Due to various stimulus packages and measures taken by the
governments, the condition of financial and stock markets around the world
showed signs of improvement from January of 2009. According to the U.S.
National Bureau of Economic Research, the recession ended in June 2009.
However, very large losses were incurred as a consequence of crisis and the loop
holes in the economic policies of various governments were exposed. A need for fundamental
rethinking of the basic ideas of financial policies and economics is being felt
and reforms are to be devised so as to avert another great financial fiasco as
some people would call it.
In June 2009, the U.S.A introduced a series of financial regulatory reforms addressing consumer protection, leverage limits, capital requirements for banks etc. Reforms on International level which give a greater voice to the developing third-world countries are being asked for. French President and head of the EU presidency, Nicolas Sarkozy has called for major changes to the IMF and World Bank. China’s arguments for an alternative to dollar as international currency standard have gained popularity. However there is a certain amount of skepticism in various developing countries about the proposed reforms which tend to contain the influence of powerful nations on the international frontier.
References:
B.Pranay
Reddy
PH10B006
No comments:
Post a Comment