The Effect on Global Financial Markets

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Introduction

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The effect on global financial markets erupted in the beginning of 2008 and it still prevails round the globe. When I was in India during 2008, I still remember the stock market shooting up by 4000pts in a single day and fell by 3000 pts a week later. I want to give an example, For the entire week Mr. Mukesh Ambani was the richest man in the world. This was caused due to the increase in supply of money. This was the period of Bull Market. During the 20th century United States was the supreme power in the economic institution and was orbiting around large corporations, even though they shifted from Fordism to Non-fordism. But today none of these large corporations play a major role, as the economic crisis has shattered the minds of the common man which has led to this downfall. Large financial institutions collapsed which has affected the lives of each and everyone. The United States of America was solely condemned responsible for the global economic meltdown. The entire globe was affected and banks were running out of debts. Banks couldn’t give loans to its customers as the mortgage value on their properties was declining and there was a decrease in the rate of interest. This will be discussed in detail further, so the United States came up with a $700bn bailout package, to help all the countries to work on the crisis, which wasn’t sufficient enough to come out of the recession. “Between July 2007 and March 2009, the equity prices of global banks fell by 75%.That is a loss of market capitalisation of around $5 trillion. In the UK, banks’ equity prices fell by over 80%. Taken alongside falls in other asset prices, the loss of global wealth peaked at over $25 trillion, or almost 45% of global GDP. At that point, asset price falls in the UK and US were as large as during the Great Depression"[1]

Context

In the mid 20th century the United States shifted from a manufacturing industry to a service based industry. This is where the change in the global economy triggered. Many people working in manufacturing industries started investing money in funds and became huge investors. So here we could see the change in the financial system. “The financial crisis was triggered by, Firstly, the prevalence of high stakes in the financial markets with uncertainty and secondly, relates to financial innovations which go with de-regulation in financial markets".[2] The main cause of global financial crisis was led by “Subprime mortgages and Collateral debt Obligations, Frozen Credit Market and Credit default swaps"[3]. This was so severe that the entire system started to fall eventually. After the September 9/11 attacks the “Federal Reserve decreased the interest rates to 1.75% but lags in the effect of monetory policy mean that much of the benefit of these cuts will not be felt until 2009"[4]. Less interest rates more the borrowings, so the investment banks started borrowing money from the Federal Reserve. Many investors with huge pile of money were looking out for a good investment, as they wanted more money. Countries from “Middle East, India, China and Japan started borrowing money because of cheap credit. Abundance of borrowing led to abundance of credit, which in turn led to leverages.A  It made quite a lot of good deals. Investment banks like Lehman Brothers started buying mortgages with this money and started selling them in order to make more money. Many investment banks got into home loans and mortgages. “Bank of England warned 1.2m homeowners in the UK now faced going into negative equity if house prices continued recent sharp falls"[5]. In the beginning loans were given to responsible home owners and eventually in went into non-responsible ones which led to default customers. When the prices of homes began to decline, the customers had houses which were less than the market value, so they started to forsake the property and became defaulters. The confidence level of the investors and lenders were completely disrupted and damaged by the fall in share prices. These investment banks had no money flowing but only had these worthless homes. Irrespective of long run losses there was a major problem in the payment system which led to freeze the credit market. Many major banks started pumping money into the market, a positive co-operation between all of them. Banks slashed their interest rates to stabilize the economy and revive the credit market. The smaller bank plays a major role, when larger banks start showing a sign of crisis. The slash in the interest rates was only a primary effect and it never had a psychological effect on people as they were trapped in fear of the economic meltdown. “Banks could not fix the credit crunch policy because it had legal obligations to make profit and the general public had already made their decision and had taken a legal judgement"[6].

Each and every nation has taken drastic measures to overcome the economic crisis. Today India has overcome this recession and currently the GDP is roughly about 7.2% and an Inflation of 9% which is very good. This is because India was trading very well within the country, but had a lot of issues while trading globally during the economic crisis. There was no cut in the interest rates as we still pay an interest of 11.2% on our education loans which is quite high than the normal rates. To avoid future crisis each and every country should have a control on their inflation and GDP.

The UK government should adopt various measures in order to avoid another crisis is to minimise the lending and spending by the banks, households and the companies. If debts and taxes are high, it will persuade people from going against investing activities. Reducing service costs and taxes is another way to avoid debts, increasing them will only worsen the economy. Minimal interest rates from the banks will lead to minimal borrowings from the public, leading to gains in additional profit, and these profits can be saved as a reserve so that it stabilizes the economic condition of the country. One has to understand the effects of economical changes and act accordingly, so that the economy grows smoothly and comes to a saturation point. As told in the beginning, the cause was due to the increase in leverage by the investment banks, reducing the leverage and adding this money to the capital rather than investing or buying mortgages will help them to recover slowly. Reducing dividends to the shareholders, redesigning debt policies increases the equity of the banks which will help the lenders and spenders. All these above factors will help in repairing the balance sheets of the firms. Accumulation of debts is one of the root cause, avoiding them will lead to a better condition. Andrew Haldane says that “debt crises cannot be eliminated, but their frequency and scale might be moderated"[7]. This can be done by restructuring the credit cycle even when the profits are moderate. A recent research in UK by the “Bank of England suggests that the CPI Inflation increased by 2% in December"[8]. As I’ve heard from the general public, the inflation rate and the GDP have increased in UK so we can say that the economic crisis or the recession has finally come to an end.

Conclusion

The UK government should be alert and watch over each and every financial activity of banks and investing companies. Proper utilisation of taxes stabilizes the economy and helps in preventing from another crisis. Minimising on outsourcing of jobs leads to reduction on additional taxes. The world cannot visualise another steep growth in the manufacturing industry as many has shifted to service industry as there is a wide competition in the present market. Profit making should not be the prime motive always. To maintain and stabilize the finance driven economy it is essential to be socially responsible towards the global economy.

Reference

  • Banker explains markets failure, Taken from International Business Module, Blackboard. (online) [Accessed]28-02-2010
  • Crisis of credit Visualized video, available at https://crisisofcredit.com/ (online) [Accessed]28-02-2010
  • Global Financial Crisis, A Classic ‘Ponzi’ affair by Sunanda Sen, Pg 2 available at https://isidev.nic.in/pdf/WP0812.pdf (online) [Accessed]28-02-2010
  • https://news.bbc.co.uk/1/hi/business/7694275.stm (online) [Accessed]28-02-2010
  • https://www.brookings.edu/opinions/2008/0128_recession_prevention_furman.aspx(online) [Accessed]28-02-2010
  • The Debt Hangover, Speech by Andrew Haldane, Executive Director for Financial Stability, Bank of England. Dated: 27 January 2010 available at https://www.bankofengland.co.uk/publications/news/2010/007.htm (online) [Accessed]
  • The Debt Hangover, Speech by Andrew Haldane, Executive Director for Financial Stability, Bank of England. Dated: 27 January 2010 available at https://www.bankofengland.co.uk/publications/news/2010/007.htm (online) [Accessed]28-02-2010
  • The Debt Hangover, Speech by Andrew Haldane, Executive Director for Financial Stability, Bank of England. Dated: 27 January 2010 available at https://www.bankofengland.co.uk/publications/speeches/2010/speech422.pdf (online) [Accessed]28-02-2010

1


[1] The Debt Hangover, Speech by Andrew Haldane, Executive Director for Financial Stability, Bank of England. Dated: 27 January 2010 available at https://www.bankofengland.co.uk/publications/news/2010/007.htm (online) [Accessed]

[2]Global Financial Crisis, A Classic ‘Ponzi’ affair by Sunanda Sen, Pg 2 available at https://isidev.nic.in/pdf/WP0812.pdf (online) [Accessed]28-02-2010

[3] Crisis of credit Visualized video, available at https://crisisofcredit.com/ (online) [Accessed]28-02-2010

[4] https://www.brookings.edu/opinions/2008/0128_recession_prevention_furman.aspx(online) [Accessed]28-02-2010

[5] https://news.bbc.co.uk/1/hi/business/7694275.stm (online) [Accessed]28-02-2010

[6] Banker explains markets failure, Taken from International Business Module, Blackboard. (online) [Accessed]28-02-2010

[7]The Debt Hangover, Speech by Andrew Haldane, Executive Director for Financial Stability, Bank of England. Dated: 27 January 2010 available at https://www.bankofengland.co.uk/publications/news/2010/007.htm (online) [Accessed]28-02-2010

[8] The Debt Hangover, Speech by Andrew Haldane, Executive Director for Financial Stability, Bank of England. Dated: 27 January 2010 available at https://www.bankofengland.co.uk/publications/speeches/2010/speech422.pdf (online) [Accessed]28-02-2010

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The effect on global financial markets. (2017, Jun 26). Retrieved October 6, 2022 , from
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