Introduction to Current Financial Crisis
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A large number of people are still unaware with the term financial and credit crisis. From an Economist view point, a financial crisis occurred when a conflict disordered the money supply and wealth of the economy, or in laymen terms it can be said that, when a shortage of cash and liquidity prevails in the economy, it is referred to as financial or credit crisis (Krugman, 2001). The term financial crisis is applied to a number of scenarios or situations where the financial institution of a country abruptly looses a large part of their asset. The world suffered enormous number of severe financial crisis after the World War II but not a single one resulted in shrinking the world economy in an offense, like the current financial crisis did.
Before the arrival of the current financial turmoil, the world’s economy as a whole was stagnate and was moving with a good pace. Almost all the economical indicators like balance of payment, Foreign Direct Investment (FDI), trade surplus, consumer price index and underestimated unemployment rate showed green signals in the long run for the economy.
In July 2007, confidence of the people tumbled from the real estate market and mortgages, known as sub-prime mortgage crisis, from there the U.S market plunged in a severe recession. The mortgage crisis hit badly, the two biggest mortgaging firms Fenny Mae and Fredrick Mac and suppressed them to be default. Because of the default of the two giant mortgaging companies, the moral and confidence of the investors tumbled and the people were reluctant to invest in the real state sector, then the cash shortage occurred in the market in the year 2007, which pushed more industries towards the brink of bankruptcy.
In September 2008, financial institutions of USA suffered a severe loss first time after 2 to 3 decades, and urged the giant investment banks, Lehman Brothers and Morgan Stanley to go bankrupt, which had made the economy and financial environment a very difficult time for the economy of US as well as the economy globally (Sorkin, 2008). American International Group (AIG) had insured many billions of dollars of securities and loans pledged held by a number of banks around the world and after its failure, the money they have rendered became worthless. As per an estimate, the banks pledged over $50 billion in credit with the company which have been lost after the bankruptcy of the biggest group of USA, which urged the liquidity crunch to come on the screen. Before the financial crisis tsunami hit the world, the United States of America dominated the world with its strong economy and currency (Bernanke 2009). A number of countries in Asia, Middle East, Russia and Europe were indulged with USA in exports and imports business and by the tumbled or deteriorated situation of USA, the said countries also envisaged a negative impact on their economy and from there the financial crunch spread globally like a forest fire. American economy mainly emphasizes on credit, albeit every household borrow money, homes and car loans recurrently that is why the country did not impose any limit on the credit cards of the enterprises and not even on the individuals, which induced the major lending and investing institutions to envisaged a deeper recession, which was the worst after the World War II great depression.
Financial Crisis And Economy Of United Kingdom: United Kingdom is among the biggest economies in the world and belongs to the top 4 economies of Europe. UK is the main victim of the current liquidity crisis because the financial sectors are the biggest industry in Britain, which are in severe distress due to the current financial turmoil. UK is one of the countries which are badly hurt by the credit crunch as almost every industry is continuously slashing jobs from the past 8 to 9 months. The rate of unemployment manifests a horrible figure and shows that over 6 million people lost their jobs due to unavailability of work and credit in the industries (IMF report 2007). The main threat for the UK economy is that their currency value is consistently collapsing against the major currencies in the world. Mounting unemployment rate, unavailability of adequate credit, declining stock market, deteriorating export and shrinking currency results in loss of confidence of the investors, as neither the enterprises nor the individuals are willing to borrow money form the banks. Although the banks of UK cut down their lending interest rate to 1%, but still they were unable to win the previous confidence and moral of the customers. The International Monetary Fund (IMF) has revised its Gross Domestic Product (GDP) for the country FY 2010 of -1.5% to -2.8%.
Finance professionals thought a year ago that the UK economy is strong enough which had become particularly resilient to shock, but after the dwindling value of currency and continuously abating deposits in the banks, the perception does not seem to be working for Britain. Recent strong actions by the UK government and Bank of England (BOE) seem to be worthwhile to stabilize the economy (Bernanke, 2009). Increasing the tax rate on the corporation up to 50% and guaranteeing every person under age of 25 who has been out of the job from last 12 months will be offered a job looks like a brutal and major action to bring the economy back on track (retrieved from www.ft.com).
Financial Crisis And Economy Of Australia: Australia has a very stable economy and, due to the country’s financial and political stability it is counted as the member of the United Nations (U.N), Commonwealth of Nations and G-20 major economies. The country mainly emphasizes on the exports as it is the main resource for them to strengthen their economy.
Australian economy has been stagnate to 3.6% from the last 15 years, which shows that the country was going with a reasonable pace before the hazards of the liquidity crunch ruin the whole world. Statistical data reveals that the unemployment rate in 2007 was under control which manifested a figure of 4.6% but now it surpasses the rate of 7%, which shows how severely the country has been hit by the global financial crisis which deprived hundreds of thousands of people from their jobs (IMF report 2007).
After injecting into the economy twice by the stimulus packages of A$10.4 billion and A$42 billion FY 2007 and 2008 respectively gives some kind of relief for the economy to become viable but still it is unable to halt the reserve bank of the country to cut its forecast of GDP growth FY 2010 to just 0.5 percent, which was previously (in November) predicted as 1.75 percent (retrieved from “www.bis.org/bailout packages for Australia). Current economic situation of Australia does not seem to be good and if sharp fall in economy persists, then the outlook of the jobs will become worse than expected in future.
To overcome the financial constrain which is expected, the worst after the great depression of 1930; Australian government took a remarkable step of pledging the money of their investors for three years. It means that the government is responsible for all the money deposit in the banks. The Australian Prime Minister Kevin Rudd said that the Government is with the industries and mainly with the financial institutions and the government stand behind all the money that the Australian banks borrow from the foreign institutions by giving guarantee for all the deposits in the banks for 3 years. Australian Government also intends to pump another $4 billion in secondary market of mortgages. Recent decisive and brutal actions from the Australian Government will definitely enhance the moral and confidence of the investors as well as the depositors (Australian Financial Review 2009).
Financial Crisis And Economy Of Asia: Asia is the fastest growing region in the world, which has an impressive influence in economics, culture and politics. Since the year 1990, the contributions of Asia has been consistently increasing in the Gross Domestic Product (GDP) of the world; as in 1990, Asia contributed about 14% of world GDP. By contrast, in the year 2006 it surpasses from the contribution in GDP contributed by US which was 22% of the total world GDP and manifested a contribution of 24% in the world’s GDP (retrieved from www.adb.org). The continent has the largest reserves and the highest savings rate around the globe.
Incredibly China is the country which is least bothered by the current financial crisis, mainly due to the volume of credit in their banking sector. The financial sector of China is very strong. Industrial and Commercial Bank of China (ICBC) is the largest bank in China, as far as the equity is concerned. The bank has deposits of over $3 trillion which makes it the number one bank around the globe (retrieved from ICBC Website www.icbc.com). Some negative impacts of financial crisis sill envisaged that the country’s GDP contracted by 10.1% first time in 3 years, which is mainly due to the economic slowdown in exports all over the world and urged over 6,000 citizens to lose their jobs (Gullapalli, 2008, The Wall Street Journal). Due to the strong financial health of the banks in China, the country is still in a satisfactory condition as compared to the other dominating economies. The people of China are least worried about any bankruptcy in the country yet. Some sort of threats can be seen which may slowdown the economy, which are exports and boosting consumer demands. Imperatively Wen Jibaro, who is the president of the country, announced a stimulus package of 4 trillion Yuan ($586 billion) to boost up the export graph and the demands of the consumers as well (Pimlott, 2009, Service Sectors records small growth).
Japan is the second biggest economy of the world and the largest economy of Asia, which is in severe downturn mainly due to the current financial crunch. It seems that the financial institutions of Japan are the main cause which pushed the country’s economy in an adverse situation. Bank’s poor credit discipline and Non-Performing Loan (NPL) are the main threats for Japanese economy. It is estimated that the country lost up to Yen 100 trillion merely due to the banking crisis. The Stock market of the country also manifested a vulnerable position as the Nikkei was at 8,000 in October 2008 compared to its peak of 39,000 in 1989 (retrieved from “globalcrisisnews.net/japans-economy”). IMF forecast that the country’s economy will shrink more in the upcoming years, which ultimately leaves a bad impact on the unemployment rate.
The essence of central bank is quite imperative from the viewpoint of a country. Countries always contemplate on the prevailing interest rates of the country to keep the money supply at a constant rate, due to the brutality of the current financial crisis. Number of countries had reduced their interest rates to support their money supply U.K. & U.S. decreases their rates as low as 0%, followed by Japan which was 1.25%, to induce their investors to park their money in long term investments. Prime Minister of Australia Kevin Rodd, took the institutive to pledge the money of the investors and keep the interest rate to up the certain level to increase the confidence of the investors.
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