and Financial Environments...
and Financial Environments~
One of the major
challenges which have faced the world financial and monetary environments was
the 2007 crisis which began in the US (Claessens, Kose, Laeven &
Valencia, 2014). This crisis was caused by several factors including the trade
imbalance in the globe, harmful deregulation of the financial markets, and poor
consumption patterns in the USA. The crisis affected the world economy
negatively by reducing consumption leading to the collapse of industries, loss
of employment, and the inability to access credit (Edey, 2009). To recover from
the crisis the government instituted several fiscal and monetary policies.
These included a reduction in taxes and interest rates and an increase in
government spending (Claessens et al., 2014). Still, many challenges continue
to exist as a result of this crisis. This paper provides an analysis of the
causes, effects, and measures taken with regard to the 2007 global crisis.
Causes of the Global
Financial and Economic Crisis
The world’s trade imbalance was a major contributor to the global
financial crisis (IEG, 2012). This imbalance had been caused by China, which
had joined the World trade organization six years earlier. The system allowed
the country to flood the world market with its exports which were substantially
cheaper than other products (IEG, 2012). To maintain its competitive advantage,
the country maintained its low exchange rate. As more people bought Chinese
products, the countries began registering an increase in their deficit while
China’s trade surplus increased (Bilali et al., 2012). Additionally, there was
a massive shift from the production industry to the service industry, as the
producers of consumer and industrial goods could not compete with the Chinese
producers (Bilali et al., 2012).
Moreover, despite the new developments, the United States did not
alter its consumption patterns (Claessens et al., 2014). The citizens continued
consuming more imports while exporting less to the global market. As
a result, the country borrowed extensively to finance its trade deficit and
public budget (Claessens et al., 2014). Their main financier was China due to
its success in the world market. China, on the other hand, bought the United
States treasury bills and bonds using its substantial financial surpluses
(Claessens et al., 2014).
In the same light, the period had been marked by unhealthy
deregulation in the financial markets (Claessens et al., 2014). The United
States had not only been a huge supporter of a liberated financial market but
also led in it since the 1980s. The country was therefore characterized by a
profoundly deregulated financial market with negligible monitoring and
supervision by the FED. Under the GATS agreement, the United States was equally
able to provide financial services to other countries(Claessens et al., 2014).
Motivated by the new development and the expanding worldwide trade, the country
was characterized by several innovative derivatives and financial products.
This culminated in a bubble burst which froze the credit market.
Effect on the global
The crisis affected the global economy in several ways. First, the
world financial markets grew risk-averse (Edey, 2009). This change altered the
credit conditions making it hard to get financial credit and leading to
dysfunctional markets in several cases. The businesses, as well as their
consumers, grew less confident over the global economy leading to more grievous
results. First, people responded by reducing the amount of money
which they spent on manufactured goods (Edey, 2009). As a result of the reduction
in consumption, industrial production fell increasingly leading to significant
shrinking in GDP in industrial economies. In the agricultural
economies, the producers recorded a decrease in their incomes leading to a
similar decrease in production (Bilali et al., 2012). This change was mainly
caused by the unwillingness of the household to buy the produce at previous
prices forcing them to reduce their commodity prices. In the same light, the
agricultural producers were also receiving less credit from the financial institutions,
which amplified this situation (Bilali et al., 2012). Finally, there
was an increase in unemployment as many industries were unable to sustain their
previous employees in the face of reducing consumption (Bilali et al., 2012).
This led to a substantial decrease in the affected population’s living
standards (Bilali et al., 2012).
Recovery of the global
The global economy took several steps to recover. First, the
governments in place instituted practical fiscal policies (Cavusgil, Knight
& Riesenberger, 2017). In this regard, the governments influenced their
economies through their revenue collection and expenditures. They, therefore,
modified their taxation levels to modify the amount of money which households
had at their disposal (Liborio, 2011). They equally modified the taxation rates
imposed on the firms. In the same light, they focused their spending on the
areas which supported the growth of economic activity (Liborio, 2011).
Additionally, the governments adopted several monetary policies. Under these
policies, they used their currency boards or central banks to control the
amount of money which was present in the economy. These regulatory bodies
determined the monetary base and influenced the cost of borrowing to facilitate
price stability and create trust in the currency (Cavusgil et al., 2017). These
two activities were major contributors to the recovery of the global economy.
Fiscal and monetary
Notably, the governments adopted expansionary policies to
stimulate greater economic activity in the economy. First, the government
lowered the tax rate imposed on the working class (Claessens, Kose, Laeven
& Valencia, 2014). This ensured that the households had enough money to
spend and thus boosting the economic activities in the country. For
instance, with increasing spending, the firms were able to sell greater amounts
of their products (Claessens et al., 2014). Moreover, the tax rate imposed on
the firms was also reduced, which acted as an incentive to operate and enabled
them to employ more people due to the ability to earn greater profits (Cavusgil
et al., 2017). The governments also bought back their bills and
bonds from the general population, which increased the amount of money which
was circulating (Liborio, 2011). For instance, the provided incentives like
subsidies to the companies operating in the manufacturing sector (Liborio,
2011). The regulatory bodies also lowered the interest rates which encouraged
the industrial companies to borrow capital for production purposes (Claessens
et al., 2014).
Challenges that remain
for the global economy
Nevertheless, there are major challenges which remain in the
global economy as a result of this crisis. Foremost, the crisis has
had significant effects on the fertility rates of the developed economies
(Chen, Mrkaic & Nabar, 2018). According to Chen et al. (2018), these rates
have continued to register a steady decline which is expected to affect the labor
force in the near future. Additionally, the income inequality which
resulted due to the crisis is perceived to have increased significantly (Chen
et al., 2018). This is especially true for the populations which experienced
major losses due to the reduction in output and unemployment during the
aforementioned period (Chen et al., 2018). Finally, the net migration rates
within the advanced economies not only reduced significantly after the crisis
but also continue to exist as such over the years.
Evidently, the global crisis had major negative effects on the
countries. The crisis led to the collapse of major economies and a decrease in
the overall economic activity (Edey, 2009). The governments, therefore,
instituted various fiscal and monetary policies to address these challenges.
While this improved on the overall situation of their economies, it has
continued to affect the world in several ways.