Impact of the Financial Crisis on the Global Economy

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 Impact of the Financial Crisis on the Global Economy

Author Name: Mehwish Ayub (ACCA & Accounting & Finance)

laureatefolks@gmail.com, WhatsApp: +923334446261

 

1.      Introduction

The financial crisis incurred in 2007-2008 had affected the economy of the world. The financial crisis 2007-2008 also known as a global financial crisis it is considered to be a severe crisis before the pandemic recession of COVID’19 in 2020. It was considered to be the bursting of the culminated perfect storm that had affected the economy of the world leading to the bankruptcy of Lehman Brothers and subsequently leading to the collapse of the international banking industry. Financial institutions suffered great damage as a result of this crisis.

1.1.            Research Questions

·         What were the reasons that led to the financial crisis

·         How this financial crisis affected the whole world

·         What were the after-effects of this crisis on the banking industry

1.2              Objectives of the study

·         To find out the reasons that led to the financial crisis

·         To find out the impact and extent to which the financial crisis affected the whole world

·         To investigate the after-effects of this crisis on the banking industry

1.3              Significance of the study

The current study aims to find out the reasons behind the financial crisis and how this crisis has affected the economy of the world. This study also aims to identify how this crisis has left an impact on the global economy and changed the lending terms and conditions and phenomenon for the banking industry.

2.                  Background of the study

The financial crisis 2007-2008 has affected the economy of the world was caused due to deregulation in the financial industry as the banks involved in the crisis were engaged in hedging funds and trading with the derivates. Financial institutions in their greed demanded more mortgages to support the profitable sales of these derivates which resulted in this financial crisis. The financial crisis that arose from the United States resulted in the severe contraction of liquidity and the outcome of which was that the housing market of the US collapsed. 

A financial crisis is faced when the financial assets of the organization decrease in value as compared to its financial liabilities as an outcome of which a business might face future difficulty in meeting its financial obligations as the organization is left with less current assets that can be easily converted into cash to meet its current obligations.

The financial crisis that incurred in 2007-2008 arose in the US and it has affected the economy and banking institutions operating globally. The reason behind that started in 2001 as the interest rate decreased and the bank started issuing loans to its customers at lower interest rates. Loans were issued to the customers to purchase homes to those who didn’t even have the sources to pay them back. The crisis occurred as the energy prices increased unexpectedly in the global market which led to an increase in the inflation rate. The interest rate also roe automatically. With an increase in inflation, the value of the mortgaged property decreased and the borrowers of the loan had no other way left to reimburse their loan payments.

This study is to find out the impact of this financial crisis on the global economy and further precautionary measures taken by the financial institutions after this crisis to prevent themselves from future financial losses.

The crisis that arose in the US has affected the economy globally as the price of the shares in the capital market fell due to the loss of confidence of the investors. After this crisis, banks had tighten their policies to release loans. Internal trade was affected due to a decline in demand for goods and difficulty faced by the market to retain a balance of supply and demand.

The major reasons behind the recession include negative regulation and corruption of the banking system, and monopolist market structure, and government and international monetary guarantees of banks.

The effect of this crisis prevailed as it was estimated in 2012 that during the financial crisis the net worth of the American property assets fell down by $17 trillion resulting in a loss of 26%. It has been estimated that between 2007-2009 almost 7.5 million jobs were lost. The decline in the global economy started after the fall of GDP in the US by 4.3% that resulted in deep stress. It is stated in research that it took 25 years to recover from this recession. During the global financial crisis, GDP shrank by 6.9 during 13 months(Choi & Douady, 2009).

To overcome the consequences of the financial crisis $700 billion which is also known as the Troubled Asset Relief Program was released in 2008. In 2009 $787 billion was released which helped to avert the global financial depression (Toarna & Cojanu, 2015). The reasons that were found by the researchers after ten years of the recession were the red flags and blamed the banks for lending risky loans. Global debt continued to swell after the crisis rising the government debt by $31 trillion.

Loan with low-interest rates has resulted in an increase in government debt over the same period. Global non-financial debt has been doubled to hit $66 trillion by 2017(Mosley & Singer, 2009). This poses a potential risk especially when the debt is in foreign currency. Turkey’s corporate debt dominated in the US has doubled in the past ten years. The corporate borrowings of Chile and Vietnam were also increased.

Conclusion and Recommendations

The financial crisis 2007-2008 has started in the US has affected the economy of the world as the economy of the world is interlinked in the form of loans, etc. which are in foreign currency. It was not possible to recover from the losses unless the government wouldn’t have intervened and provided loans to stabilize the banking sector.

Now is the time to look forward and policies should be made by the bank that should restrict the bank from lending risky loans and getting involved in corrupt and monopolist activities.

The red flags that were the main reasons for this disaster also need to be studied and precautionary measures need to be addressed and implemented to avoid future financial losses.

 

References

Choi, Y., & Douady, R. (2009). Chaos and Bifurcation in 2007–08 Financial Crisis. SSRN Electronic Journal, 3–13. https://doi.org/10.2139/ssrn.1522544

Mosley, L., & Singer, D. A. (2009). The Global Financial Crisis: Lessons and Opportunities for International Political Economy. International Interactions, 35(4), 420–429. https://doi.org/10.1080/03050620903328993

Toarna, A., & Cojanu, V. (2015). The 2008 Crisis: Causes and Future Direction for the Academic Research. Procedia Economics and Finance, 27, 385–393. https://doi.org/10.1016/s2212-5671(15)01010-2

 

 

This is Muhammad Naeem; a Ph.D. Scholar; born in Lahore Pakistan; a Professional Online Tutor in Business Education (Marketing & Management Courses), a Creative Non-Fiction Writer (Blog posts, Articles, Web Contents, Social Media Content Writing, Biographies, and Autobiographies, etc.), An Editor, Proofreader, Digital Marketing Specialist, and a passionate learner in learning new skills. He has obtained his graduation degree in Commerce from “Hailey College of Commerce”, and MBA (Marketing) from "Institute of Business Administration", University of the Punjab Lahore, Pakistan. He has also obtained a Master of Philosophy (MPhil) in Business Administration with a thesis in Marketing from the National University of Modern Languages (NUML) Lahore, Pakistan. Moreover, He is having exposure to the traditional experience of more than one decade in academia and industry. He believes in self-learning, acquiring new skills, and a passion to contribute something to make this world a better place. Regards,

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