Impact of Global Economic Crisis of 2008

Impact of Global Economic Crisis of 2008

Introduction

The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren't so vocal, influential and inconsiderate of others' viewpoints and concerns. This paper aims to view the unequal impact of the global financial crisis. A detailed study of the impacts of the crisis of cross border capital outflows and investment has been included herein. Furthermore, the various factors that affect the attractiveness of countries for FDI as well as the differences in industrial characteristics around the world have also been discussed within this essay.

Discussion

Uneven Impact of Global Crisis

Extent

The global economic crisis of 2007 was one of the worse ones in history. The extent of the damage was so grave that many renowned financial firms went bankrupt, while others have been sold out to competitors at low prices. The world's richest nations have come to the rescue of the leftover financial firms and banks. The governments of these wealthy nations have spent skyrocketing amounts on bailout packages formulated to save these institutions from going bankrupt. The global credit loss in 2009 was around $2.8 trillion. Around $9.7 trillion were spent by American taxpayers in efforts to fund these plans. About 33% of share of firms has been diminished due to this crisis. Rescue funds spent by UK and European nations amounted to around $2 trillion. Figure 1 of the Appendix illustrates the concept.

Reasons

According to an empirical analysis, there have been three major reasons that heavily contributed to the occurrence of the global economic crisis of 2007:

Increasing Global Unevenness

An increase in imbalance can be identified by current account deficits which in turn disturb the positions of current accounts. Foreign investors start claiming their investments in fear of the deteriorating economy. At such times, the routine measure taken is to match a deficit with net capital inflows. These inflows cause

A decrease in the cost incurred by banks in foreign markets, due to wholesale funding;

A decrease in long term interest rates;

An increase in credit supply to local economy, leading to a subsequent increase in property prices (Nier & Merrouche 2010, p.8).

Loose Monetary Policy

Research shows that a loose monetary policy is largely responsible for decreasing the cost of wholesale funding for mediating agencies, which led them to enjoy an undue advantage. Banks also took more credit risks and developed subsequent liquidity issues due to such a monetary ...