America is the major power in the world. It plays a very important role in the world economy. All the international financial markets are situated in America and it is the key to the success and development of the world. The fundamental financial structure in America is very strong compared to other countries in the world. The economy when affected in the American market has the influence on all the financial markets of the world. Today America is going through the tough times. The supreme power is affected by the financial crisis and so the world market.
In 1930’s America has seen the same kind of financial crisis. At present, the issue is more serious than before and need to be rectified very soon. It can be said that today’s financial crisis which America and the world countries are facing now has its immediate roots in 2001, the shock of terrorists attacks and the end of the software boom. (Project syndicate) ? Alan green span, the former head of the U. S Reserve system said that the current financial crisis is an event that occurs only once in 100 years. According to the National Bureau of Economic Research (NBER), US entered recession in December 2007.
There are many reasons for the world’s financial crisis that has been started in United States of America. The first and the foremost reason is the failure of banking sectors. It has begun in 90’s when the financial institutions issued credit cards to the people with doubtful credit histories. Many individuals found this as an easy way to spend and pay later despite of the high interest rates. This caused excessive debt. The monetary expansion helps to lower the costs and makes easier to borrow money, which would lead to inflation.
This time the banks have concentrated in giving housing loans. While the consumer stand in a queue, it has become boon to the mortgage brokers, politicians, banks and finance banks. The banks have extended the credit limit with minute creditworthiness. As a result, the people could avail loans from the banks at the lower interest rates and even without any down payment. The interest charges were too long and they were pushed into the future. The banks thought that even the creditors do not pay the amount, they can repossess the house at the higher value.
But when the housing prices started declining, lending conditions were stiffen and the banks started repossessing the houses whose value was very low and it does not even cover the value of debt. The interests have been cut over 1% by the US central bank and the Federal Reserve. Along with the consumer debt, the consumer irresponsibility also plays a key role for the declining of the market. As a result, the financial giants Lehman brothers filed an appeal for insolvency. (America-World financial crisis)? These giants once controlled the financial structure of America.
Because of the financial crisis started in the America, the world is suffering a lot. Each and every sector is being affected by the world financial crisis. The affect is being seen in the industrial, automotive, finance, banking and insurance sectors. The other important reason for the present financial crisis in America is the privatization. Privatization plays a very important role. The financial institutions like banks and mortgage brokers should not be given much freedom, this causes the crisis. The shareholders in the stock market need to be protected.
It is the Government’s responsibility to take very strict actions and overcome the problem of financial crisis. The employees are thrown out of the companies not only in America but through out the world because of the financial crisis that’s affecting the whole world. Another cause for the financial crisis is the artificial consumption boom. This has been started since 2000 when the stock market fell down completely. Gross domestic product was fell down by 1. 4% in the third quarter. Many Asian countries wanted to upsurge their foreign currency reserves to get protected from the financial crisis.
In August 2007, the credit crunch became visible. The interbank liquidity was in the process to dry up. Due to this effect, the stock markets fell down and the central banks added liquidity to the market. T here has been many causes for the declining of the financial market in the country which includes structural weaknesses. Recession is thought to be a part of the living world where there are imbalances between the supply and demand. It was the failure of the free markets as well as the failure of the Government. Inequality of income and wealth is also one of the causes for the crisis.
Due to the crisis, most parts of the world are being affected. To maintain the liquidity of the market, the bank of Japan has assigned $ 25 billion. The stock indexes of the countries like Taiwan, South Korea, Hong Kong and Japan has been declined by four percent. The financial crisis around the world due to America is very pathetic. Germany, the Europe’s economic powerhouse is also suffering with the financial crisis. It is also facing the stage of recession. The German parliament approved 500 billion euro as the financial rescue package.
Italy has also been very strong in its financial position with its major industries like fashion and motor vehicles. But now the country is lagging behind in its economic growth and suffering with high rates of unemployment. London is the largest financial center in the world. But after the financial crisis in America, it is also on recession and the economic output was fell down by 0. 5%. Due to the information technology and the manufacturing boom, India changed into a second fastest growing economy. By foreign investment and the outsourcing by the international companies, India has benefited a lot.
But due to the recession and the financial crisis, India has cut down its short term lending rates to 7. 5%. ( Financial crisis: World round-up)? The financial crisis has severe effect on the developed and the developing countries. International trade was mostly affected. Trade is the engine of the world economy. In 2007, nearly 8% of the growth was seen on the world trade. But now, the world trade is likely to decline for the first time since 80’s. (Trade Is Key to Overcome Economic Crisis) 4 Due to the lack of trade credit and the falling global demand, the world trade is affected.
The World Bank is establishing Trade Facilitation Facility. Over the next three years, this facilitation will help the low-income countries for US $ 30 million. This facility helps to develop the technical assistance and capacity building. This also helps to reach import standards by which the countries can enter into world market successfully. The financial crisis, which began in America, has the worldwide effect. In Britain, three of the country’s most esteemed banks – Lloyds, Royal Bank of Scotland and HBOS have been bailed out. Iceland’s banks have been nationalized.
The International Monetary Fund has given $15. 7 billion to Hungary. The countries which depend on heavy industries were hit hard. All the construction works have been stopped in most of the countries. Crop prices started to fell down over 60 % and the ruler areas and farmers suffered as a result. The growth of the developing countries has been affected much. For example, The growth in developing countries have been expected to reach 6. 4% in 2009 but it has seen the striking change of 4. 5 percent. The global trade, which grew by 9. 8% in 2006, is expected to get declined for the first time since 1982.
(Global Financial Crisis) 5 The effect of financial crisis can be measured by equity market declines, large current account deficits, exchange rate depreciation and the increase in spreads. The U. S dollar has the unique role and it is the world’s broadly chosen currency. It has been a basis for prestige, power and financial opportunities for the U. S. Government and the American companies. Now the United States of America which is the supreme power is facing the financial crisis. The Government should take necessary steps to overcome this pathetic situation.
The remedy is that the public sector should be given much importance and it should be given more authorities. All the banks should not be privatized. Nationalized banks are very important to overcome the present situation. The banks should be under the control of the government. Liquidation should be handled with utmost care. There is a need for the government to provide rescue packages and fiscal stimulus. The housing sector in the United States must be stabilized to overcome the crisis. In the developing countries, the food and fuel price shocks have already started.
There is a need to promote co-operation approaches to international management. Many meetings are being held to discuss about the on going problem of the financial crisis. The G7 nations, who are the world’s wealthiest countries met in Washington DC. But several plans have already failed. (G7 Nations) 6 From the 21 member economies, the Foreign and Trade ministers of the Asia Pacific Economic Cooperation forum joined together to discuss how to overcome the present financial crisis. (APEC Ministers) 7 They have decided to expand trade activities, strengthen consumption level and multilateral trade system.
Commitment is required to overcome the financial crisis. A radical change can be seen in the landscape of American finance. The Wall Street which is the independent investment bank is almost extinct. Morgan Stanley and Goldman Sachs have become commercial banks themselves. Lehman brothers, who are considered the giants in the financial industry has gone burst. The non-bank financial institutions, hedge funds, securities dealer, money market funds are disappearing at the lighting speed. The gross liabilities of America have come up to $1 trillion, which is almost twice the cost of the Iraq war.
Now, it’s time to think about the America’s position in the Global market. For a healthy global system, new construction of political and economic cooperation along with the emerging power is necessary. It needs a stronger and more effective form of Global economy governance. America requires international cooperation and new world economic order to protect itself and the world from the financial crisis. References: 1. Jeffrey D. Sachs, The roots of Americas financial crisis, Project Syndicate, 2008. http://www. project-syndicate. org/commentary/sachs139 2. America-world financial crisis, http://usat7. info/? p=13