THE GLOBAL FINANCIAL CRISIS: IMPACT ON THE WORLD ECONOMY

INTRODUCTION

• The global financial crisis was triggered by the sub-prime mortgage crisis in the US.
• This has destabilized the financial marketsof the developed world leading to collapseof notable names in the banking business.
• Production in these economies has also been adversely affected leading to a decline in output.

THE CAUSES

• Globally, companies and individuals havean ever increasing demand for capital forboth personal and corporate investments.
• Traditionally, banks have been very conservative and stringent in their requirements
• This makes access to finance difficult for the majority of the people. 
• Relaxation of lending terms for mortgageswas as a result of the boom in the housingsector.
•  Millions of Americans with poor credit history who might not have bought their homes were granted sub-prime mortgages.
• This led to the growing of the mortgage bond market as mortgage brokers focused on less than ideal clients.
• This proved to be very profitable as banks earned a fee for each mortgage sold and urged brokers to sell more and more.

OTHER SHOCKS TO THE GLOBAL ECONOMY

The effect of the global financial crisis was worsened by rising global energy and commodity prices which pushed up inflation. Emerging and developing countries have particularly experienced strong rises in prices reflecting the high weight of food in their consumption baskets

IMPACT ON THE US ECONOMY

·        The banking industry has been badly hit as many

of the mortgage bonds backed by sub-prime

mortgages have fallen in value.

·        A slow down in the building industry which

contributes 15 percent to US output has had a

ripple effect on other industries especially makers

of durable goods.

·        Bailouts of financial entities

Ø Before the financial crisis reached its peak in

the US, the federal government bailed out

investment bank Bear Stearns with nearly $30

billion to avert a major financial default.

Ø It invested as much as $200 billion in

preferred stock of the loss-plagued finance

giants Fannie Mae and Freddie Mac and at

least $5 billion in their mortgage securities;

Ø It further provided an emergency loan of $85

billion to American International Group (AIG)

Inc. in return for an ownership stake of as

much as 80% in the stricken insurance giant.

·  The Collapse of Lehman Brothers

Ø  Ranked among the world's top investment banks, the Lehman Brothers expanded aggressively into property related

investments including the sub-prime mortgages.

Ø  The sub-prime crisis with the decline in value of housing forced the company to take huge write downs on the value of those assets and led to the loss of about US$14 billion.

Ø  This further led to Lehman’s prime customers pulling out their monies into much safer investment avenues e.g. investing in government bonds.

Ø  This contributed to the company’s filing for bankruptcy protection and hence its fall. The collapse of the company put

tens of thousands of jobs around the world at risk.

Ø  The impact was also huge in other major economies considering the integration of the financial markets and the global nature of business today.

Posted in: Akt.Internasional