Analysis of the Global Economic Crisis

Question: Describe aboutthe global financial crisis. Answer: Introduction In 2008 the world faced an unprecedented crisis in financial systems. It was called the global financial crisis that led to financial systems imploding. The tax politico-economic paradigms shifted with big economies like the United States, china and japan being among the worst hit. Nepal was not left out of the equation either; it faced a period of financial crisis in its banks, high unemployment rate and slow economic growth rate(Berlatsky, 2010). Banks and insurance companies began to suffer serious losses, while their assets and other valuables began to fall free. Many money markets witnessed heavy losses with market instruments depreciating to all-time lows. Nepals money market came almost to a halt. What was initially thought to be isolated cases of collapse of banks became the norm throughout the world. A period of uncertainty had engulfed the world into a gloom with the same principle of capitalism being put into question. Governments had to react fast and strategically in order to revive the ailing financial sector. Previous growth seen between 2003-2007 had come into a sudden halt and even the Nepal had been shaken. Analysis of the Global Economic Crisis in Nepal and the World Although the financial and economic crisis is a complex process with multiple factors that have influenced its origin and development, essentially this process was generated by the imbalance between the real economy and virtual economy.The genesis of the problem is in the United States, which for years has enjoyed - in their capacity as political and financial superpower - huge advantages to access public and private credit to finance operations of its government and its citizens consumption.(Berlatsky, 2010) As a result, the US economy had become an economy of excess and irresponsibility, with consumers living far above their actual capabilities and resources, thanks to unrestricted access to credit. Nepal was going on the same route of unrestricted credit while other countries like UK had taken off.It was thus an economic boom based not on the actual production of wealth but on mere speculation and not on responsible investment but careless bet was built, and where expectations for higher profits, unreasonable and unjustified, ended up spreading and getting drunk to everybody. Examples of Financial crisis that affected global financial crisis The speculative bubble fueled by cheap credit was reflected in the diverse markets: prices of raw materials - minerals, oil, food - rose greatly in recent years driven by blind faith that the demand for these products continue to grow indefinitely , as shares of companies and banks grew exorbitantly with the illusion of infinite profits. The same happened with the US market real estate loans, just when the bubble began to burst(Claessens and Horen, n.d.). Access to mortgage credit became so easy that millions of families embarked on buying houses, which led in turn to rising housing prices especially in the united states and Europe. And when borrowers began to default on their payments, these banks found they had a huge amount of mortgages whose real value was falling apart: they had made loans that they could not recover, but still had the same obligations to its depositors and investors. And a reaction was initiated chain where these risky investments in assets of dubious value have generated huge losses for its shareholders and in turn, the falling value of its shares has sparked panic in the financial and credit markets around the world - including Nepal. This article analyzes the reasons for the global financial crisis while also having a perspective on politico-economic responses by various governments launched to remedy the situation and the course impact. But with continued assets restructuring and multiple sales risk transfer it came a situation when it became impossible to ascertain the actual risk level of each of the titles. In this regard the rating agencies, despite not recognize, were unable to fulfill their task. Inability of financial institutions to self regulate while keeping the government of their regulatory frameworks, with long stable periods that encourage excesses and Manias(Kawai, Lamberte and Pak, 2012). The international financial system was inherently so that, according to economists, you cannot escape periodic financial crises, with consequences more devastating. The UK and Spain are among the countries Thus, pragmatism seems to have overcome ideology, negotiation has worked and have finished adopting coherent plans in almost all advanced countries, plans that meet both the need to recapitalize the banking system partially nationalizing the banking and secure loans interbank. In this sense both the approval of the US plan, which was only accepted by Congress after the introduction of important amendments-as subsequent clarifications Treasury finally accept temporarily nationalize part of banking Finally, the global financial crisis was a period when the European economic block led by UK, France and Germany to stamp world financial authority while introducing the euro as the currency for trade after the dollar. Reforms Creating and developing systems to tackle the crisis. This was aimed at meeting the increasing appetite for funds by countries worst hit by the crisis globally while stabilizing the economic and financial sectors of the world. The united states was at the fore front of the reforms. the IMF increased its resources for lending significantly since the onset of the global crisis. Increase in credit to the crisis. The IMF reorganized its lending framework to adapt it to the needs of countries and greater emphasis on crisis prevention, and simplified the program conditionality. Since the beginning of the crisis, the IMF has committed more than $ 700,000 million in financing for member countries.(Scott, 2009)Assistance to the poorest in the world. Concessionally lending reforms were undertaken by the IMF and the policies were geared to engaging the low-income and poor economies in lending and to protect them from more economic downfall. Analysis and policy advice of the IMF more focused. The IMF provided risk analysis and provided policy advice to member countries to help them overcome the challenges and the effects of contagion arising from the global economic crisis. He also undertook major initiatives to strengthen supervision and adapt to a globalized and interconnected world, taking into account lessons learned from the crisis. Reform corporate structure of governance of the IMF to include other economies. Creating a firewall against the crisis The increase in available resources of financing to the IMF in support of countries that are members was a key elements of engagements aimed at overcoming the global financial crisis. Immediately after the crisis, member countries increased additional financial resources to the IMF through agreements that were bilateral to obtain loans amounting to about SDR 170.000 million (about USD 250,000 million to current exchange rates). Policy analysis and advice focused on IMF To strengthen supervisory role the IMF undertook key initiatives to respond to a globalized and interconnected world. These initiatives were developed to modernize the legal role of supervision to include the effects of contagion (the time when the economic policies of one country can affect others), further analysis financial risk systems, enhanced assessment of the external positions of members and immediate responces to concerns raised by these latter countries. Unemployment levels soared affecting more than 200 million people worldwide and income inequality becoming unbearable in many countries, the IMF internally established a Working Jobs and Growth criteria, which recommended avenues and provided guidelines for improving the support given by the IMF to its members to achieve their goals in terms of development, job creation and income distribution. A reform of the governance structure of the IMF to better reflect the global economy .(Scott, 2009)The reforms of 2010 are based on the reforms on quotas and agreed in the post global financial crisis period.from the initiated reforms, 54 member countries were includes with China, Korea, India, Brazil and Mexico the countries that will benefit most from the largest increases. In the case of other members, including poor countries, there will be an increase vote numbers, which remains a percentage of the total cast votes. Impacts of financial crisis in different economies The impact of the international economic crisis will be felt in Latin America through two channels. The first, via trade flows, and second, via capital flows. To understand the vulnerability of the region from this point of view to the transformations that are happening globally, the first thing is to understand the structure of world trade and the role played by Latin America in this. Thus the cycle of global capital has led to the growth of private credit in Latin America. The highest levels of liquidity associated with capital inflows have led banks to significantly increase lending to the private sector at the highest rates globally, thus financing the expansion of domestic consumption. As expected, the increasing availability of credit is having significant effects on asset prices in economies in the region. In the case of housing prices must be at regional level during the period 2008-2010 increased at an annual rate of 15%. This growth rate is the highest compared to the emerging markets of Asia and Eastern Europe (IMF 2011). It is not surprising to find that in those countries where it has grown faster fastest credit growth is also recorded in housing prices. The recent collapse of real estate markets in the US, the UK and Spain shows the fragility and dangers of a rapid rise in property prices when this occurs in a context of expansion of credit, as is currently happening in the region. However, the effects are not confined only to housing. It can be seen how, after the impact of the crisis, the market capitalization in the region also continued to grow at a rapid pace(Shiller, 2008). With the exception of Mexico and Argentina, the capitalization of the stock values measured in dollars has doubled over the last two years in other countries. As in the case of capital flows, it is interesting to note the changes in the composition of the market capitalization. It is then clear that several economies in the region are all elements that characterize this financing scheme: high dependence on commodity exports with FDI increasingly directed to this sector; strong currency appreciation coupled with rapidly rising prices of financial assets; growth of external financing via short-term dollars through portfolio flows. In the same way that these elements have combined to drive growth in the region over the last period, making it appear that the risks have diminished, in the next stage of the economic cycle will combine to cause a rapid deterioration of the economic situation and financial. Proposed recommendations * Implementing regulation to credit to the private sector by financial institutions in order to control the rapid growth of household and corporate debt. * Coordinate the creation of a control system of capital at the regional level that would reduce the inflow of speculative capital to the region, with the aim of reducing the negative impact of such flows on the value of local currencies and credit. This system could be accompanied by the creation of a regional tax on financial transactions, which simultaneously serves to finance the activities of the South Bank. * Accelerate the implementation of the South Bank in order to fund regional programs to strengthen regional capacity, to reduce dependence on commodity exports currently plaguing the region. Strengthening regional integration would also create economies of scale required for the development of a manufacturing sector in different countries of Latin America. * Organization audit committees debt at regional level to allow for monitoring and surveillance mechanisms management of public debt. The objective of the audit is to implement a mechanism to control preventively the socialization of financial sector losses associated in a scenario of regional and international financial panic. Conclusions: The global financial crisis which was as a result of excess liquidity and a lack or poor regulations of the integrated international financial systems was taking toll on countries economy including Nepal. Unilateral actions by global institutions like the IMF and different governments were enforced to prevent collapse of world economies(Shiller, 2008). The banking and insurance sectors were the hardest hit, this culminated to reduced trade even in other sectors . 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