The global financial crisis started in the year 2008, and it is set to continue unleashing devastating effects on the global economy. The magnitude and the level of disruption of the global economies have led to speculation of various causes that has contributed to its occurrence. The major factor that explains the occurrence of this crisis are the loose monetary policies (Bean, 2008).
John Taylor argues that interest rates were well below the ones implied by Taylor’s rule. In addition, large current accounts surpluses in emerging economies with underdeveloped financial markets. For instance, China has largely driven the interest rates up (Caballero & Gourinchas, 2008).
The last, but not the least is the loose financial regulation which has led to the increase in risks and investments in poorly understood new financial products (Borio 2008). This paper seeks to describe global economic crisis and its impact on global finance currently and over a couple of years to come.
The global crisis has crucial dimensions which includes buildup of both corporate and household debts (Brunnermeir, 2009). As the main concern, these bad debts have caused confusion to the UK government on how to deal with loan defaulters. These ever increasing bad debts have been threatening the solvency of banks.
Also, the apparent change in bailing out policy from the earlier rescue approach, created a panic in the interbank lending rates, thus worsening the situation further. However, the uncertainty of banks’ future has seen them as ceasing lending causing to stagnate the system as a whole. Moreover, stock market investors’ panic has led bank shares to perform poorly in the stock market.
Nevertheless, bank regulations are pegged on the notion that loans’ forms have a significant percentage of bank capital, and since decline in stocks has reduced capital to a great extent; this has, in turn, led to massive decline in the bank lending. This further threatens the stability of the global financial system (Morris, 2008).
In addition, there has been an abrupt change in policy towards bailing out banks whereby the UK government is buying shares from the banks with intent of restoring the profitability, and then sell its shareholding to investors (Taylor, 2008). The significant effect of recognizing bad debt is that, the idea of recovering large amounts of capital lent as housing loans is no longer worth (Taylor, 2008a).
This has made the financial sector to shift the cost of the crisis to the public to the extent of using taxpayers’ money in order to survive. Banks are rebuilding the profit base by declining to reduce interest rates on funds borrowed which leads to reduction in rate of return to depositors and savers, thus causing a conflict between the government and banks (Morris, 2008).
This has led to serious implications to both current and future pensioners. Furthermore, there has been massive loss of jobs, as various firms succumb to the effects of credit crunch.
To remedy this situation, the government has been encouraging mergers to help in curbing the effects of global economic crisis. However, this bail-out approach has resulted in a considerable ideological cost, both in terms of reputation and increased legitimacy of regulation.
The effects of global economic crisis will continue to have serious effects on many firms around the globe overtime. This is because firms are being forced to downsize their operations, as a result of difficulties in obtaining finances from the banks (Adalid & Detken, 2009). Banks are raising the interest rates as one of the measures to correct the effects of global credit crunch.
Also, debts, owed to the firms, have proved not forthcoming and, instead, firms are writing them off. Therefore, the profits which could otherwise be utilized in expanding the businesses are now utilized in writing off bad debts. However, the problem of declining job opportunities will persist overtime, leading to increased poverty levels amongst the households.
To correct the global economic crisis, governments across the world are taking measures on places that will see the economic growth of their respective countries back to normal, though this is a process that might take quite longer.
References
Adalid, R., & Detken, C. (2009). Liquidity shocks and asset price boom/bust cycles. Working paper, 732(2), 5-56
Bean, C. (2008). Some Lessons for Monetary Policy from the Recent Financial Turmoil. Remarks given at a conference on Globalisation, Inflation and Monetary. New York: SAGE
Borio, C. (2008). The financial turmoil of 2007-? A preliminary assessment and some policy considerations. Bank of International Settlements Working Paper, 251, 56- 89
Brunnermeir, M. (2009). Deciphering the Liquidity and Credit Crunch 2007-08. Journal of Economic Perspectives, 23, 77-100.
Caballero, R., E. Fahri, H., & Gourinchas, P. (2008). An equilibrium model of global imbalances and low interest rates. American Economic Review, 98, 358-393.
Morris, C. (2008). Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash. London: Public Affairs Books.
Taylor, J. (2008). Monetary Policy and the State of the Economy. Testimony to the US House of Representatives. New York: SAGE
Taylor, J. (2008a). The financial crisis and the policy responses: an empirical analysis of what went wrong. NBER Working Paper, 14631, 56-78