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In the beginning of 2007, the United States of America woke up to the financial crisis caused by the events in its housing market. This rapidly spread to other major world economies due to the international interbank relations that included interbank lending and so on. Major financial institutions failed the financial stress test and this led to a widespread panic among many firms.
Smaller economies such as African countries and some Asian economies also felt the impact of the financial crisis and this led to a decrease in their economic growth rates (Economic Commision for Africa 3). This paper discusses the problem created by the global financial crisis and assesses the viability of the courses of actions taken to counter the problem.
Issues caused by the financial crisis
The financial crisis pains were felt in practically all countries of the world. International financial sector was temporarily thrown into chaos as there was a breakdown of trust among many financial sector players. This resulted in a complete freezing of interbank lending which subsequently forced a collapse in the global securities exchange.
The crisis also meant that developing countries’ economies recorded a negative growth. The growing economies’ stock market’s volatility went high and this resulted in significant loss of wealth in their stock markets. The crisis also caused a huge decline in the commodity prices of goods exported to the major economies such as Europe and America.
The volume of Africa’s exports also went down because of the crisis. This was caused by retarded growth of the major export markets i.e. China, Europe, and the United States of America. This slow pace their economic growth meant that the demand for Africa’s exports went down resulting to African countries becoming net importers.
Action plans to tackle the effects of the crisis
Many countries have taken measures that are aimed at cushioning their economies against the negative effects of the global financial crisis. Monetary and fiscal policies have been the most common approaches among many countries in trying to reduce the negative effects of the financial crisis (Michael 28).
Countries have moved to recapitalize financial institutions. This is aimed at ensuring that the financial institutions’ financial positions are strong to withstand liquidity problems. Some countries have enacted regulations that are aimed at doubling and even tripling the minimum capital requirement for financial institutions such as banks. This ensures that the banks financial positions with regard to liquidity are at a secure level.
The governments’ measures taken to curb the adverse effects of the crisis through monetary policies have however been largely criticized as non visionary steps that are aimed at saving current situations at the expenses of future’s (Economic Commision for Africa 4). This is because major steps taken in the short-run results in long-run inflation problems. Governments that have reduced taxes to increase consumption by their citizens often create future problems of inflation.
Most of these measures taken or that are being considered involve financial commitments. Most of the developing economies face the financial constraint in that they have limited resources to commit to all these causes of actions (Michael 29). This has caused a lack of sustainable solution in tackling the negative effects of the crisis. This situation is rapidly turning from a financial crisis to a potential humanitarian crisis.
The effects of the global financial crisis need to be addressed regionally and internationally since single government measures prove to be insufficient. Smaller and emerging economies also need a great deal of help so as to prevent the effects of the financial crisis from turning to a humanitarian crisis. If these measures are taken, the viability and sustainability of the courses of actions will become more achievable to both the developing and developed economies.
Economic Commision for Africa. “Meetings of the AU Conference of Ministers of Economy and Finance and ECA Conference of Ministers of Finance, Planning and Economic Development.” Twenty-eighth meeting of the Committee of Experts (2009): 2-15.
Michael, W. “Macroeconomics of the Global Financial Crisis: Monetary and fiscal Responses.” Oxford review of Economic Policy 26.1 (2010): 32.