The global financial system is in a shambles, according to many economic analysts. The finances of many of the world’s biggest economies have taken a nosedive in the aftermath of the onslaught of the global economic crunch. Where did it all begin? Did the United States have a hand with the collapse of the sub prime market? How big was the damage, and is there a way out of the economic maelstrom that has ravaged the economies and lives of the people it has affected? The U. S.
recession and the global financial crisis The financial recession in the United States really started with a period of economic prosperity (Congressional Research Service, 2008). Real estate was dominant in the market and was rapidly gaining momentum coupled with the skyrocketing value of the oil prices (TRT-World, 2008). Banks in the United States gained large profit margins from the upswing in the mortgage prices in the housing boom, y offering promos for low-income households (TRT-World, 2008).
Home owners who wanted to avail of the program had to rate their loans on the increasing value of the homes they wanted to purchase (TRT-World, 2008). But the banks’ practices inevitably contributed to the beginnings of the recession (TRT-World, 2008). The steep fall in real estate prices put the U. S. market into a wild tailspin. Real estate owners, finding difficulty to pay the loans they acquired with the banks, had their houses taken back by the banks (TRT-World, 2008).
The banks, in turn, had the sequestered houses put on the selling block, but the banks faced a dilemma, as the houses’ value began to depreciate as more houses went up for sale as the result of delinquent payers on their loans (TRT-World, 2008). As the crisis deepened, there was a general mistrust in the financial markets, as prices for gold indicated (TRT-World, 2008). The question thus posed is, is the financial meltdown in the United States unique to itself or is it another chapter in the economic history of the world? The Financial Crisis: Seeing the pattern
In the chronology of economics, there is the instance of a financial dilemma every so often in many sites across the globe (Congressional Research Service, 2008). The incidents of credit crunches have occurred in many countries, such as Sweden , Russia, Korea, the United Kingdom, Argentina, and Japan, and finally in the United States (Congressional Research Service, 2008). What naturally occurs is that law and policy makers express the usual shock at the situation, and then proceed to dismantle every existing statute (Congressional Research Service, 2008). So what precedes the whole affair?
In the run up to a financial meltdown, markets tend to overreach themselves; debts are hedged over zealously, a rise in credit, risk misappropriations, massive capital flight, deregulation of an industry without sufficient oversight mechanisms in place (Congressional Research Service, 2008). As is, every financial meltdown is unique but with some similarities to each (Congressional Research Service, 2008). As in the Asian financial meltdown in the 1990’s, countries such as South Korea and Indonesia loaned excessive amounts to shore up their financial markets (Congressional Research Service, 2008).
After acquiring a mountain of reserves, these monies were invested in the failed “dot-com” stocks boom (Congressional Research Service, 2008). Many countries in the developing world are just expected to grow by 4. 5 percent, a significant drop from earlier 6. 4 percent predictions (The World Bank, 2008). Many of the developed economies in the world are expected to have their markets contract even further at 0. 1 percent by 2009, with growth to stagnate at 1 percent worldwide (TRT-World, 2008). As stated earlier, banks had a significant contribution in the demise of the current financial system (Anup Shah, 2009).
The banks practiced securitization, lumping their loans into assets for sale, dumping volatile loans to other financial institutions (Shah, 2009). Banks such as Lehman Brothers bought the secured loans in order to put them on the selling block (Shah, 2009). Other banks, interested to take advantage of the situation, borrowed more money on order to purchase these securities (Shah, 2009). As the sub prime crisis exploded, banks carrying these loans ran out of people to buy these assets (Shah, 2009).
So with the crisis in full swing, the last question to be asked is what should be done to remedy the situation? Many aver that the crisis has given the needed impetus to create a new world wide financial mechanism (TRT-World, 2008). In the aftermath of the financial storm, governments have leaned towards bail out policies for the banks in their countries that have not gone under (Shah, 2009). Policy managers across the globe must tackle the challenge of stabilizing the gyrating world economy, at the same time sustaining the momentum toward financial recovery (Subir Lall, 2008).
In the context of the United States, the basic issues lie in the degree that current statutes in the country may have to be changed to be uniform with global standards and to what extent the United States is willing to put itself under international scrutiny (Congressional Research Service, 2008). But the main issue of the call for the new international framework is the form it is to take (Congressional Research Service, 2008). For example, the time frame for the creation and implementation of the new accord must be determined.
The United States, long the foundation of the international economy, should instead give way to a more broad international make-up and be more submitted to the new international trade and financial regulations (Congressional Research Service, 2008). Whatever the decisions, the initiative must be discussed now, unless the crisis last even longer. References Congressional Research Service. (2008). The U. S. financial crisis: the global dimension with implications for U. S. policy. Retrieved February 18, 2009, from http://www. fas. org/sgp/crs/misc/RL34742. pdf Lall, Subir. (2008, October 8). IMF predicts global slowdown amid financial crisis.
IMF Survey Magazine. Shah, A. (2009). Global financial crisis. Retrieved February 18, 2009, from http://www. globalissues. org/article/768/global-financial-crisis#Acrisissoseveretheworldfinancialsystemisaffected TRT-World. (2008). Global financial crisis. Retrieved February 18, 2009, from http://www. trt. net. tr/International/newsDetail. aspx? HaberKodu=2e945fee-b00b-4441-a2a3-3677a5c77eb8 The World Bank. (2008). G20: Global financial crisis: responding today, securing tomorrow. Retrieved February 18, 2009, from http://web. worldbank. org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21972885~pagePK:64257043~piPK:437376~theSitePK:4607,00. html