Essay on Global Financial Crisis- A Tsunami In World’s Economy

The entire world is facing the global financial crisis. It took place in American Share Market (Wall Street) and later it covered all the markets of the world. As a result the chief countries are facing the Banking insolvency and unemployment. The Traders are suiciding due to un ability to pay their debts. Exports rate has fallen down and all the economic activities are badly disturbed now.

The governments are giving packages to markets and banks so that the run of finance may be kept continued and the credit also may be saved. Repo Rate and Cash Reserve Ratio (CRR) had to be reduced. Rep Rate is the rate on which Reserve Bank provides loan to others Banks. The main countries as America, France, Britain and Japan have been broke in finance.

The export target is reduced. The companies both private and public have made thousands of workers unemployed. The famous Indie Company General Motors sold its share to be safe from insolvency are other company has also given indications.

The subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit market and banking systems triggered by the failure of mortgage companies, investment firms and government sponsored enterprises, which had invested heavily subprime mortgages.

The crisis, which has roots in the closing years the 20th century but has become more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weakness in the global financial system and regulatory framework.

Subprime lending is the practice of making loans to borrowers we do not qualify for market interest rates owing to various risk factors, such as income level, size of the down payment made credit history, a employment status.

The value of U.S. subprime mortgages was estimates at $ 1.3 trillion as of March 2007, with over 7.5 million first lien subprime mortgages outstanding approximately 16% of subprime loans with Adjustable Rate Mortgages (ARM) were 90 days delinquent or foreclosure proceedings as of October 2007, roughly triple the rate of 2 (By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%. The U.S. mortgage market is estimated at $12 trill with approximately 9.2% of loans either delinquent or in foreclosure through August 2008.

Subprime Arms only represent 6.8% of the outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007. During 2007, nearly 1.3 million prosperities were subject to foreclosure fillings, up 79% versus 2006.

The reasons for this crisis are varied and complex. The crisis attributed to a number of factors pervasive in both the housing and markets, which developed over an extended period of time.

There many different views on the causes, including the inability of home owners to make their mortgage payments, poor judgment by the borrower and/or the lender, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, final innovation that distributed and perhaps concealed default risks, bank policies, and government regulation (or alternatively lack thereof).

The great effect of financial crisis is being seen in Indian economy. Jet Airlines had declared to lay-off thousands of workers, but the Central Government strictly forbade to expel any worker from the job promised to companies and banks for necessary financial aid. So there is stability in our country.

To increase home ownership was a goal of both Clinton and Bush administrations, in America. As the Clinton administration’s top housing official in the mid 1990s, Mr. Cisneros loosened mortgage restrictions so first time buyers could qualify for loans they could never get before- contributing to the great housing and financial crisis that began 10 years later.

Several critics have commented that the current regulatory framework is outdated. President George W. Bush stated in September 2008: “Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we’ve seen how one company can grow so large that its failure jeopardizes the entire financial system.

The Securities and Exchange Commission (SEC) has concealed that self-regulation of investment banks contributed to the crisis.

Central banks are primarily concerned with managing monetary policy; they are less concerned with avoiding asset bubbles, such as the housing bubble and dot-corn bubble. Central banks have generally chosen to react after such bubbles burst to minimize collateral impact on the economy, rather than trying to avoid the bubble itself.

This is because identifying an asset bubble and determining the proper monetary policy to properly deflate. It is a matter of debate among economists.

Federal Reserve actions raised concerns among some market observes that it could create a moral hazard. Some industry officials said that Federal Reserve Bank of New York involvement in the rescue of Long- Term Capital Management in 1998 would encourage large financial institutions to assume more risk, in the belief that the Federal Reserve Would intervene on their behalf.

On July 19, 2007 the Dow Jones Industrial Average hit a record high, closing above 14,000 for the time. On August 15, 2007, the Dow dropped below 13,000 and the S & P 500 crossed into negative territory for that year.

Similar drops occurred in virtually every market in the world, with Brazil and Korea being hard hit. Throughout 2008, large daily drops became common, with, for example, the KOSPI dropping about 7% in one day, although 2007’s largest daily drop by the S&P 500 in the U.S. was in February, a result of the subprime crisis.

Beginning in mid-2008, all there major stock indices in the United States (the Dow Jones Industrial Average, NASDAQ, and the S&P 500) entered a bear market.

On 15 September 2008, a slew of financial concerns caused the indices to drop by their sharpest amounts since the 2001 terrorist attacks. That day, the most noteworthy trigger was the declared bankruptcy of investment bank Lehman Brothers. Additionally, Merrily Lynch was joined with Bank of America in a forced merger worth $50 billion.

The subprime crisis had a series of other economic effects. Job losses in the financial sector were significant with over 65,400 jobs lost in U.S. A. in September 2008. And its reflection is also being seen in other countries such as India. The sudden lack of credit also caused a slump in car sales. Ford sales in October 2008 were down 33.8% from a year ago, General Motors sales were down 15.6% and Toyota sales had declined 32.3%. On in five car dealerships are expected to close in Fall of 2008.

Role of Federal Reserve Bank

It is the Central Bank of U.S.A. It took some steps in partnership with central banks of other countries around the world. Such as:

(1) Between 18 September 2007 and 30 April 2008, the target for the Federal funds rate was lowered from5.25% to 2% and the discount rate was lower from 5.75% to 2.25%, through six separate actions.

(2) The Federal and other central banks have conducted open market operations to ensure member banks have access to funds (i.e. liquidity) These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rate; charged to member banks (called the discount rate in the U.S.) for short term loans.

(3) The Federal is using the Term Auction Facility (TAF) to provide short-term loans (liquidity) to banks. The Federal increased the monthly amount of these auctions to $100 billion during March 2008, up from $6C billion in prior months.

(4) In July 2008, the Federal finalized new rules that apply to mortgage lenders.

(5) In October2008, the Federal expanded the collateral it will loan against to include commercial paper, to help address continued liquidity concerns.

The President George W. Bush announced a plan to voluntarily and temporally freeze the mortgages of a limited number of mortgage debtors holding Arms. This action is part of an ongoing collaborative effort between the US Government and private industry to help some subprime borrowers called the Hope Now Alliance.

The Hope Now Alliance released a report in February 2008 indicating it helped 545,000 subprime borrowers with shaky credit in the second half of 2007, or 7.7% of 7.1 million subprime loans outstanding in September 2007.

Several years before the crisis Fairfax Financials Prem Waste warned: “We have been concerned for some time about the risks in asset-backed bonds, particularly bonds that are backed by home equity loans, automobile loans or credit card debt (we own no asset-backed bonds). It seems to us that securitization (or the creation of these asset-backed bonds eliminates the incentive for the originator of the loan to be credit sensitive.

With securitization, the dealer (almost) does not care as these loans can be laid off through securitization. Thus, the loss experienced on these loans after securitization will no longer be comparable to that experienced prior to securitization.

Finally we can say that subprime mortgage crisis created the great effect over the world wide economy and India is not an exception of it. Thousands of workers have to lose their jobs. The companies and industrial groups are in great shock. Export rate is fallen badly. The banks are being solvent. But we can hope to conquer over it because all the economists are making attemptions and the governments of the countries are taking it seriously.