The financial crisis which began in 2007 is seemingly beginning to end, even though unemployment is increasing. Many households and micro banks meet challenges in re-establish their balanced sheets, and unemployment in conjunction with the sub-prime loans sustains a high rate home foreclosure. The U.S economy recorded a 1% decline in the second quarter relatively less than the 6.4% drop experienced in the first quarter. On the other hand, a slight growth is anticipated after the first half of the year. Noteworthy, the drop in the inventory has stagnated growth, whereas the export has largely favored it. Reviewed records depict a 3.9% decline in the GDP through the four quarters, reporting the sharpest peak-to-trough drop experienced since World War II (Nanto, 2009).
Policymaking to address global economic crisis and the imminent global depression has shifted from restraining corruption to precise reforms focusing on improving recovery and modification of policies to prevent a reoccurrence of the crisis. Other factors including health and war in Afghanistan have contributed to the crowded policy agenda (2009).
The congress has contributed greatly in efforts to prevent the reoccurrence of crises in the future through provision of funds and outlining the basic principles for economic steadying and rescue packages as well as educating the public via hearing among other means. Another role of the congress is paramount in dealings to restructure the international monetary systems, in refunding international financial organization including the International Monetary Fund, and in refunding poverty reduction branches of the World Bank and local development banks (2009).
Characteristic of financial crisis
Apparently economic crisis presented as boom in the housing market sector and an increase in foreclosures. This culminated into some of the biggest and most respected banks, insurance institutions and investment houses declaring a state of bankruptcy or has had to seek reimbursement. October 2008 saw the freezing of flows, declining of lender confidence and economic recession of countries across the world. The economic crisis reflected a important drawbacks in the financial system all across the world, and in spite of consolidated lessening of financial procedures by authorities, huge fiscal incentive packages, and huge sum of monetary interventions by central bank and authorities, the economic crisis was apparently far from ending (2009).
In the United States the economic crisis stretches to the primary national concern of sustaining the economic security of its citizens. Moreover, it’s impacting the united the U.S. in attaining the national policy objectives including sustaining a political stability and international relations as well as supporting a fiscal infrastructure that promote the running of the global economy. In addition, the impact of the economic crisis is depicted in international flows of import and exports, political risk in certain countries, government expenditures and revenues, and in rates of development and unemployment (2009).
Terminologies of financial crisis (2009)
- Systemic risk: – refers to the risk that the collapse of a single or several market contributors including central banks will impact via a financial structure and cause serious problems for stakeholders other business sectors (International Monetary Fund, 2009).
- Deleveraging: – means the loosening of debts. This encourages organization to borrow in order to purchase capital which perpetuates their growth capacity or increase returns on the investments. Deleveraging usually mitigates losses and reduces the risk of default, although it may depress security and asset worth, resulting in huge losses when it is done by selling assets at discount.
- Procyclicality: – refers to the propensity for the market stakeholders to decide over a business phase which augment the “boom-and-bust” outcomes.
- Preferred equity: – means a cross between a debt and common stock. It confers to the bearer a claim, prior to that of basic stockholders, on income and on property in the occasion of liquidation.
- Collateralized debt obligations [CDOs]: – refers to a type of predetermined asset-backed protection whose worth and payments depend on range of fixed-income basic assets.
- Credit default swap [CDS]: – means a credit imitative contract between two complementary parties wherein the purchaser settles payments at intervals to the seller who benefits from a sum of money in a certain credit occurrence.
Impact of terrorism on global economy
In the near past terrorism has been shown to target more business facilities than any other sector such as diplomat, government military or others. Present terrorist operations have focused more on financial market. Latest terrorist attacks have adversely impacted on economy both nationally and internationally. The economic outcomes can be subdivided into long-term production impact, medium-term confidence consequences and short-term immediate consequences (Johnston and Nedelescu, 2005).
The short-term consequences of terrorist attack on the economy of the country pertains the loss of life and property, provision of temporal living aid, restitution of damaged infrastructure and systems, and the comeback to the disaster. Direct financial losses are probable to be consistent with the magnitude of the attacks and the scale of the economic impact. For instance, the September 11 terrorist event on the U.S. induced significant business disruption, although the immediate economic loss was minimal comparative to the bulk of the financial system. In fact, the direct expenses incurred from the September 11 attack were approximately $27.2 billion according to the Organization for Economic Co-operation and development (Bruck and Wickstrom, 2004 cited in Johnston and Nedelescu, 2005).
On the other hand, the indirect expenditure due to terrorism may be important and can impact the economy on a medium-term level by discouragement of investors and consumer. This can lead to a decline in the enticement to spend instead of to save, a process that can disseminate all across the economy and internationally via the usual trade routes and business cycle. Also, declining investor’s assurance can induce a widespread drop in property worth and a quest for quality which increases the borrowing price for perilous debtors (IMF, 2001b cited in Johnston and Nedelescu, 2005).
The September 11 terrorist attack majorly impacted on the top industrialized nations via a drop in demand triggered by the loss of confidence on the market and its influence on the production. Cropping markets were influenced via slugging of export and quest for quality in fiscal market. The rest of the developing world may probably been influenced through commodity market (IMF, 2001b cited in Johnston and Nedelescu, 2005)
Financial approaches concerns commitment over a considerable period of time and subsequent cost and affords a hedge around insecurity. Whereas the preliminary impact of a certain crisis may cause a market economy over-reaction due to escalated levels of uncertainty in the course of absorption and analysis of the information. And after the long-term effect of the crisis is analyzed, market reverts back to its pre-crisis position. Consequently, the financial markets escalate or plummet depending on the investors’ anticipation of crisis resolution (Taylor, 2004 cited in Johnston and Nedelescu, 2005, p. 4).
The table below illustrates the unusually proceeds experienced in the aftermath of the September 11 terrorist hit for banking quarter indicators from 14 major global economy. According to the table the incidence had a extensive adverse effects on all the capital markets. Ironically the impact was minimal relative to the rest of the global capital markets, because it depicts the smallest negative abnormal returns 11 days after the event and experienced the second fastest recovery after Tokyo (2005).
|Global stock Markets’ banking/ financial sectors||Event-day AR |
|6-day CAR |
|11-day CAR |
|Days to rebound|
CAR: – cumulative average abnormal returns
Days to rebound: – number of business days for the market to attain the pre-crisis position.
The stages of global financial crisis
The international economic crisis as depicted across the various countries of the world has been presented in four converging stages. Each stage has a policy concern, however, every stage influences the other, and no stage depicts an obvious end point until after the crisis wanes out. These stages are four and are explained in the subsequent paragraphs.
Stage I: restraining the contagion and reinforcing financial sectors
This stage concerned the intervention to control the contagion and support business sector in various nations (Jickling,n.d. cited in Nanto, 2009). Micro-economically, this has entailed policy execution including decreasing interest rates, activities to stimulate and restore confidence in credit market segment, improving the money circulation, and monetary clemency. While, on a microeconomic level this has involved the processes to address immediate consequences and adverse effects of the crisis such as monetary recovery packages for distressed organization, reforming debts, discarding toxic properties, introduction of capital, and pledging deposits at banking institutions. These measures had salvaged financial organizations deemed too enormous to collapse, and had seen government takeover of special organizations, buying of risky investments, and government promotion of acquisition and mergers.
In the U.S., the Federal Reserve has reduced its discount rate as low as 0.5% indicating that the established financial policy has nearly attained its stretching point. This is further substantiated with the set target which was rated as low as between 0.0 – 0.25%. This has pushed the Federal Reserves and Treasury to opt for quantitative financial clemency; such as purchasing government securities and adding more money into the economic circulation, and engaging directly with the toxic assets in banks possession (Labonte 2009, cited in Nanto, 2009).
Importantly, in order to bring an end to financial crisis the stakeholders must address the issue of toxic assets as well as focus on restoring the balance sheet of prominent banking organizations and other monetary organizations (2009).
In the U.S., control of the contagion have taken the collaboration of the major branches of the government including Comptroller of Currency, Office of Thrift Supervision, federal Deposit Insurance Corporation, Federal Reserve, the Treasury, and Federal Deposit Insurance. In fact these government bodies have developed a $700 billion Trouble Asset Relief Program through which the Treasury has provided for many banks, the insurance organization A.I.G., Chrysler and General Motors. In addition, the Treasury recently revealed its disbursement details of $900 billion Public Private Partnership Investment Program to resolve the problem of toxic properties contained in the commercial system (U.S. Department of Treasury, 2009, cited in Nanto, 2009).
Also, the Federal Reserve has set aside about $1.2 trillion to address any emergency to guarantee financial stability. Such interventions has entailed a security net for business banking institutions, the salvage of the Bear Stearns, a crediting capacity for investment brokerage and banking institutions, loans for commercial paper and money-market properties, and buying of securitized advance and loaning opportunities for investments and buyers to enable them purchase asset-backed assurance (Labonte, 2009, cited in Nanto, 2009).
Stage II: Managing with the macroeconomic outcomes
This phase of financial crisis have manifested prominently in budding and expanding markets which have constantly been undermined by the increasing flight of resources and declining exports and item value. In such circumstances, the authorities have opted for customary fiscal and monetary strategies to combat the economic slump, increasing unemployment and declining proceeds (2009).
To combat recession in economic development, various countries have implemented financial incentive packages aimed at stimulating financial revival or at least minimizing the damages of financial crisis. Presently, the global stimulus package aggregate is more than $2 trillion including those packages that encompass strategies that covers the subsequent years. The stimulus packages are intended as financial strategies such as government expenditures or tax remission, although some of the packages comprise measures that intended at steadying banks amongst other commercial institutions that pass as bank salvage or monetary aid packages.
The $2 aggregate in stimulus package represent an estimated 3% of the gross domestic product [GDP] worldwide, which surpasses the call by the IMF for financial stimulus accumulation of 2% of world’s gross domestic product to help contain deteriorating global economic position (Camilla Anderson, 2008, cited in Nanto, 2009). Nevertheless, if just fresh fiscal stimulus strategies employed in 2009 are considered, the aggregate and percentage of the world GDP would be significantly reduced. From the assessment of the 2009 stimulus dealings for the European Community [EC], it was reported that such dealings cumulated to approximately 1.32% of EC gross domestic product (Saha and Weizsacker, 2009, cited in Nanto, 2009). According to the IMF anticipated fiscal stimulus dealings as proportionate to the GDP for January 2009 was 1.9%, 0.9% 1.4%, 1.5% and 1.1% for United State, European Community, Japan, Asia, and other G-20 nations respectively.
In the G-20 London summit it was decided to add $1.1 trillion in capital to the global financial organizations, comprising a $750 billion extra for the IMF, $250 billion to improve international business, as well as $100 billion went to the multilateral development banking organizations.
Stage III: regulatory and monetary market reform
This phase encompass decision for determining the reforms in the global financial system to prevent occurrence of financial crisis in the future. So as to facilitate coordination of modification in the regulatory systems and to guarantee their political support, world leaders have conducted several global conventions to discuss modification in economic policy, implementation, omission, and regulations (2009).
This phase concerns primarily the procedures of directives and omission of the global economy, hedging tricks, derivatives, probable plan for financing and executing future financial intercessions, and standards for resource sufficiency. During the November 2008, G-20 summit, the heads passed an Action Plan which instructed finance ministers to abide by particular recommendations in domains which included;
- evading regulatory policies that encourages challenges in the business cycle;
- appraisal and conforming to the universal accounting standards, especially for complicated financial safety under circumstances of pressure;
- reinforcing transparency of loans derived financial dealings and decreasing their universal risk;
- appraisal of the motivation for risk-taking and novelty expressed through compensation procedures;
- appraisal of the capital requirements, governance and the mandates of the International Financial Institutions (2009).
Again, in the London summit, the representatives resolved the problem synchronization and oversight of the International Financial System by designing a new Financial Stability Board (FSB) which comprise of representative from all the G-20n countries, the European commission, Spain, Financial Stability Forum associate. The new responsibility of the FSB is to coordinate with the International Monetary Fund to give the initial signs of macroeconomic risks and the pre-determine measures to counter the imminent problem.
Stage IV: addressing political, security and social effects of the crisis
This phase of the crises concerns resolving security, social and political consequences of the global economic crisis. Actually, these are secondary effect associated with the position of the United States on the global landscape which regards to its comparative leadership status, and social as well as political effects in the nations considerably affected by the global economic crisis. According to the February 12, 2009 claim by Blair, instability in countries due to the global financial crisis coupled with the subsequent geopolitical reverberations, apparently poses a major short-term security threat aside from terrorism (cited in Nanto, 2009). Further, this phase has many subdivisions which I will explore in the subsequent paragraphs.
Political leadership and government
The global financial crisis exerts most of its weight on political headship and authority in nations via two primary mechanisms. Firstly, the crisis may present in the form of dissatisfaction by the citizens because of job losses, witnessing investments plunging into a state of bankruptcy, loss of asset in tangible and financial properties, and confronting reduction in their product worth. This may culminate into civic opposition to the existing government in democratic nation; while in non-democratic countries this may result in provoke extremist movements where unemployed youngsters may succumb to religious radicalism that condemns western civilization and promotes terrorist operations (2009).
The steep fall in oil price poses significant implications for particular countries including Yemen, Venezuela, Mexico, Russia and other who largely depend on oil turnover for their economical progression. While the United States upholds moderation of oil prices as a desirable condition for its consumers and regulation of trade, it may determine the political strength of specific petroleum dependent nations. The connected fall in prices of certain produce including tea, coffee, rice, beef, iron ore, copper ore, and rubber bear dismal repercussions for exporter nations in Asia, Latin America, and Africa (Johnston, 2008).
The second form, by which the financial crisis may manifest, is through the efforts of the ruling government to sustain power at the same time dealing with the adverse consequences of the financial crisis. Many nations attribute the financial turmoil to the financial leaders in London and New York City in collaboration with the respective “laissez faire governments.” Various governments use the technique of blaming the western civilizations, particularly the United States to reinforce the spirit of nationalism for their own selfish interest (Nanto, 2009).
State capitalism, protectionism, and economic philosophy
It is speculated that the financial crisis may accelerate the already deteriorating neoliberalism which was triggered by President Reagan and the Prime Minister Thatcher. This have placed the cropping markets nations, especially those in Europe in indecisive state whether to embrace the capitalist model or the socialist model (2009).
Moreover, state capitalism which involves the nationalization or ownership of shares of an organization, is increasingly gaining popularity in Russia, in the U.S., Asia and Europe. This has given rise to the nationalization of insurance, banks, and other financial organizations. Also, resource injection and lending to private organizations have been adopted as components of intervention and stimulus packages, which have pulled bureaucrats and politicians personally into financial management at the organizational level (2009).
Various countries have executed trade related approaches that intend to safeguard or promote local industries. The World Trade Organization [WTO] report of July, 2009, claim that in the resent past months, financial system have shifted towards trade-regulation and modification policies while protectionist approaches had been generally restrained. Also, there had been minimal trade facilitating and liberalization approaches, and the government have not yet orchestrated the removal of the measures that were adopted prior to the crisis (2009).
Furthermore, the WTO noted that various fresh trade-regulating and modification measures had been implemented in conjunction with a further reinforcement of trade interventions assessment such as safeguards and anti-dumping. Still, the WTO has reported an addition in steel duty by India, an incline in the import tariff on motor vehicle by Russia, re-introduction of export subsidies for specific dairy commodities, South Korea has increased tariff on petroleum imports.
The global economical crisis has emphasized the United States to be paramount in the global economy. Local financial crisis including the Latin American Debt crisis, Japan’s banking crisis, or the Asian financial crisis can transpire without causing significant effects to other worldwide financial framework. However, when financial system of the U.S. stumbles its effects can be felt by the rest of the stakeholders of the global economy (Friedman and Zeihan, 2008, cited in Nanto, 2009). This can be explained by the fact that the U.S. is the prime guarantor of the global financial framework, the owners of the dollars commonly used as a worldwide medium of exchange and currency treasury, and a major source of the monetary capital that circulates around the world seeking profitability. Although the rest of the world may not appreciate it, fiscal crisis in the U.S. most often has a global impact on the economy (2009).
The extra loaning by the global financial organizations would backup the financial stimulus endeavors and could be focused to the nations hardly hit by the global financial crisis. Numerous nations have borrowed enormously in global economy and owe huge sums of money in terms of dollars and Euros to the international loaning institutions such as the IMF. Furthermore, some countries have banks with debts coverage almost same as the national Gross Domestic Product (2009).
Johnston, B. R., & Nedelescu, O. M. (2005). The impact of terrorism on financial Markets. Washington, D. C.: International Monetary Fund
Nanto, D. K. (2009). The global financial crisis: analysis and policy implications. Congressional Research Services report for congress. Web.