The effects of the global financial crisis - Myassignmenthelp.Com

Question: Discuss about The effects of the global financial crisis. Answer: Introduction: The assessment mainly helps in identifying the causes of financial crises, which liquidated the financial sector and negatively hampered growth. The possibility of second financial crises is also evaluated, which might hamper financial sector of the world. Furthermore, the impact of financial crisis on the relevant counties is also evaluated with specific focus on Nepal. Moreover, this helps in depicting the problems, which was faced by the organisations in different counties regarding valuation in the financial market. Lastly, the overall proposed reforms that was used in controlling the financial crises is adequately depicted in the assessment. Discussing the possible causes of the financial crises: The financial crisis was one of the major drawback in the current financial sector of the world, which increased insolvency condition of many companies. The financial crisis of 2008 was subject to different causes, which are depicted as follows. Deregulation: The major deregulation of Glass Steagall Act of 1933 mainly allowed the bank in US to use deposits to invest in derivatives. This major change in the regulation was mainly conducted to support banks in increasing their competiveness among foreign firms. The second major regulation was Commodity Futures Modernization Act, which mainly exempted credit default swaps and other derivatives from regulations. Both the deregulations mainly allowed banks to acquire additional risks and use the capital market as gambling for increasing their results from investment (Admati and Hellwig 2014). Furthermore, these measure mainly allowed banks to increase their risk talking ability, while raising their chance to become insolvent. Securitization: The securitization of funds, mortgage backed securities, collateralized debt obligation and other derivatives are mainly used by banks to hedge their funds. The financial product such as Mortgage backed securities are mainly used as a collateral, which allowed banks to generate the required capital to continue their operations. This Mortgage backed securities were mainly traded by banks in the secondary market, which helped in improving their cash flow. The Mortgage backed securities mainly have bundles of mortgage with lot of securities, which are backed by credit rating. The use of credit default swaps allowed investors to reduce risk, which was supported by AIG insurance company (Allayannis et al. 2017). These MBS and CDS mainly increased the overall problem for investors, as default in mortgage increased. The default rate of borrowers mainly increased, which reduced the returns from securities. These overall decline in repayment increased risk and hampered profit generation capac ity of investors. Growth of subprime mortgages: The third main reason behind the augmentation of the financial crises was the growth in subprime mortgages. These relevant increment was mainly conducted after the enforcement of Financial Institutions Reform Recovery and Enforcement Act, which allowed fulfilment of Community Reinvestment Act. This mainly allowed the banks to eliminate redlines in poor neighbourhoods, which in turn increased growth prospect of banks. The announcement of George Bush in fulfilling the American dream of a house was mainly fulfilled by Fannie Mae and Freddie Mac, who directly supported banks with the required capital and sold the mortgages in secondary market (Amies, Munford and Sutton 2017). Fannie Mae and Freddie Mac reassured banks that they would securitise the subprime loans, which led to the pull factor complementing the push factor of CRA. This mainly reduced restrictions of the banks in accumulating the overall loans from different borrowers. However, the growth in subprime loans negatively affec ted growth prospects and laid foundation of financial the crisis. Fed raised rates on subprime mortgages: Lastly, the increment in FED rates on subprime mortgages mainly forced borrowers to default due to rising interest rate. The FED from 2000 mainly declined interest rate, which reduced the overall payments conducted by borrowers. This overall reduced payment mainly increased the number of borrowers, who could take loans from banks. These low interest payments motivated borrowers to accumulate more loans and increase their assets. FED mainly increased the overall interest rates in 2004, which resulted in high repayments of interest that was conducted by borrowers. This high repayment amount mainly raised the overall problems of the borrowers and led to defaults. The increment in number defaults mainly increased the risk in Subprime mortgages, which was conducted by banks (Amiraslani et al. 2017). Therefore, in 2007 due to the augmentation of financial crises, FED reduced interest rate from 5.25% to 4% for preventing mortgage holders in selling their homes. Depicting whether GFC could be repeated again: After evaluating financial position of counties in the world, relevant augmentation of Great financial crisis is seen to be a possibility. The measures used by countries during financial crisis was not adequate, which in turn reduced capability of financial sector to continue with its operations. Armantier et al. (2015) mentioned that like US major countries in the world injected taxpayers money into their financial sector to smoothly continue their operations. Moreover, during 2013 small recession was seen, due to the default of Greece. The Brexit from Euro zone increased relevant problems for the financial sector of European countries. One of the major problems, which is affecting financial capability of countries are declining monetary policy and increasing debt accumulation. The following event mainly indicate repetition of GFC, which could hamper financial sector of countries. Decline in Chinese economy: The decline in Chinese economy can be seen in recent years, where the Chinese government has been interfering with stock market and inflating index value. The investors in China due to pressure from the Chinese government were not able to comprehend changes in the capital market. Furthermore, it is estimated that second financial crises would start from China, where the bubble would burst and decrease share value of the organisation. Boustras and Guldenmund (2017) mentioned that decline in total export value mainly reduced capability of Chinese government in compensating market growth. Decline in Oil prices: The decline in oil process all around the world is also reducing capability of the oil producing countries and oil refining companies in generating the required level of revenue from operations. In addition, this decline in oil prices is mainly hampering major revenue generation capacity of US companies and indicating the reducing in demand from consumers. This relevant decline in oil consumption directly reduces the revenue generation capacity of the companies and might decline jobs in the country Decline in countries ability to pay its debt: The relevant decline in countries ability to pay their debt was mainly identified from the defaulting of Greece. This mainly indicated the financial problems, which is faced by countries in paying their debt due to declining revenue. Carvalho, Ferreira and Matos (2015) stated that high debt accumulated by countries is mainly increase interest payment and hampering their ability to conduct smooth operations. The situation seen in Greece where non-payment of debt and defaulting led to the decline in financial sector and hampered profitability of the investors. Explaining the scale of impact of GFC on other countries and in Nepal: The negative impact of GFC was seen in maximum of the countries all around the world. Moreover, after September 2008 the full-fledge financial crises was mainly faced by both developed and developing countries. This negative impact of financial crises mainly resulted in the decline of financial sector of European countries. The following impact of GFC on developed and developing countries are evaluated as follows. Negative impact of financial crises on developed countries: The relevant financial crises have directly hit the finance sector of developed countries, which in turn declined value of capital market. The financial crises were mainly conducted due to the default rate of borrowers for mortgage loans. Majority of the developed countries were investing in US mortgage backed securities (Cohen et al. 2014). Hence, the defaulting of mortgages mainly declined the value of mortgage based securities to zero and wiped out their total capital. Negative impact of financial crises on developing countries: The overall negative impact of financial crises mainly affects emerging market of China and Brazil despite the robust growth seen in the economy. This was mainly conducted due to the reduced financing provided by foreign investors. Furthermore, this reduced financiering condition by foreign investors mainly declined liquidity condition of developing countries capital market. The financial crisis also reduced cash flow and increased losses of foreign investor, which increased selling pressure in developing counties having higher foreign direct investment. Hence, the financial crises reduced investments of FDI in developing counties such as India, which crashed their index. Impact of financial crises on Nepal: Nepal has a fragile economy, which directly depends on external forces rather than internal forces for smoothly running the economy. However, the financial crisis of 2008 has a drastic impact on the economy condition of Nepal, as the country mainly relies in export, which is conducted to US and other developed countries. Furthermore, the exports are mainly conducted on credit basis, which drastically hinders the payment capability of US and other developed countries (DeYoung et al. 2015). Hence, the payment incapability of creditors resulted in massive layoffs and unemployment with closure of major companies. This mainly led to massive decline in employment condition, while reducing economic stability of Nepal. Therefore, the reduction in remittance will mainly shake the financial condition of the economy and raise unemployment. This financial crisis mainly discouraged consumer market and investors, which in turn declined financial position of Nepal. Identifying the actual or proposed reforms which have been eventuated: After the financial crises adequate reforms were proposed and implemented by governments to reduce its negative impact on the economy. The reforms mainly helped in reducing any kind of financial problems, which was persisting in the financial sector. The following reforms was implemented by countries for nullifying the impact of financial crisis on the economy. Housing and economic recovery Act 2008: The housing and economic recovery Act 2008 was mainly conducted by the US government for reducing negative impact on financial crises (Floyd, Li and Skinner 2015). The insurance on mortgage was conducted, which helped in insuring $300 billion worth of mortgage. Furthermore, FHFB, GSEs, and OFHEO was mainly implemented by US government for reducing negative impact of financial crisis on US economy. Lending practices: The US government in response to the financial crises mainly considers bills to regulate the lending process of banks and financial institutions. This regulation mainly helps in declining the specific lending practice, which augmented the financial crisis. Federal reserve powers: The relevant proposal was mainly implemented in 2008, where regulatory powers was used by US Federal Reserve for intervening in the market crisis. Hence, the federal reserve mainly allows the financial institution to increase liquidation by reducing the interest rate. Short selling restrictions: The short selling restriction is mainly implemented by US government during financial crises, which directly helped in declining the negative pressure on the capital market (Haas and Lelyveld 2014). However, the practice is mainly a reform, which could be used by the government during the time of next financial crises to prevent short selling pressure in the capital market. Capital reserve requirement: The capital reserve requirement was the main factor, which led to the augmentation of financial crisis. Therefore, increment in capital reserve requirement could directly help in declining the MBS and CDS, which in turn could increase depository of banks (Wang 2014). Conclusion: The above assessment mainly helps in depicting the overall negative impact of financial crises on economic condition of US. In addition, the possible causes of financial crises were MBS and CDS, which declined financial performance of companies in US. Furthermore, the possibility of GFC is also identified, which could occur in near future due to the intervention of Chineses government in their stock market. Moreover, the scale of GFC is mainly identified to reach both developed and developing countries all around the world. Lastly, the reforms obtained by government for reducing the negative impact of financial crises and uplifting the financial sector is adequately conducted. 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