Recent Global Financial Crisis

Recent Global Financial Crisis

Introduction

The crisis which erupted in the financial systems of developed countries in the autumn of 2008 quickly affected all economies throughout the world. The result was job losses, enterprise bankruptcies and cuts in the incomes of millions of people. The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. The recent crisis, though have its origin in the developed world has greatly affected developing countries around the world. The current global financial and economic crisis has been described as the worst economic setback since the Great Depression of 1929-32. It has exposed weaknesses in the functioning of the global economy and led to calls for the reform of the international financial planning. This paper will discuss and analyse the recent global financial crisis, its causes, consequences and governments response along with the lessons learned from the crisis.

Discussion

Causes of the Crisis

It is now well documented that the resent crisis originated from the United States (Guillen, 2009), spread to Europe and has now become a global issue. It spilled from financial sector to the real economy in the last quarter of 2008. The crisis was observed to have been precipitated by the collapse of Lehman Brothers on 23 September 2008 and a continuous fall in housing prices leading to borrower's inability to refinance (defaults). The present financial crisis spread around the world through various channels. Some of these include pressures on financial institutions around the world to raise capital and withdraw funds to maintain liquidity. It has made it difficult if not impossible for many countries to refinance themselves in international financial markets. The current crisis spread from developed countries to developing and transition economies through shrinkage in global trade and a related collapse in primary commodity exports, on which many countries are dependent (Arieff, et al., 2010). It also spread through a sharp adjustment of the commodity prices which resulted into lower demand for raw materials; lower capital inflows; declining migrant's remittances flows and worsening of external debt indicators (UNCTAD, 2009b)

Economic and Financial Consequences

The current global economic crisis has its origin in the financial sector of the economies developed and was caused by the problem of subprime mortgages and the collapse of securities backed by mortgages in the United States. Financial crisis badly hit the developed as well as developing countries all over the world. Stock markets stopped working all over the world. The global economic crisis led to a sharp reduction in trade the world and a rapid decline in investment banking. Flows of foreign direct investment (FDI) that culminated in 2007 fell rapidly since the beginning of the financial crisis. The economic crisis is caused a sharp deterioration in the fiscal position of all advanced economies. World witnessed huge declines in output and employment all over the world and adverse consequences on government finances. Asset markets were totally collapsed and tax revenues shrank due to deteriorating economic ...