Causes And Measures To Avoid Another Financial Crisis Economics Essay

It has been justly said by many newspapers all over the universe that “ When US sneezes, the whole universe gimmicks cold. ” The United States was the universe ‘s prima economic power in the 2nd half of the twentieth century and London was a prima fiscal Centre of the universe. When the markets fell in 2008, their powerful position in the planetary fiscal sector came under a menace. This study is a research into the MAIN causes of the planetary fiscal crisis. The essay besides proposes recommendations for the UK authorities in order to cut down opportunities of another crisis. The fiscal crisis has been defined by Gerald ( 2009, P. 27 – 44 ) as the worst planetary economic downswing since the Great Depression of the 1930s. Deep recession has struck advanced economic systems while the emerging markets are confronting a crisp economic lag.

The fiscal crisis has been a subject of great treatment in order to understand what precisely happened and who can be blamed for it. The essay presents an analysis done by different writers, grounds given by them and concludes the chief causes/roots of the crisis along with stairss that should be taken by UK authorities to cut down danger of another crisis.

Harmonizing to Booth ( 2009, P. 52 ) the roots of the fiscal crisis 2006-2009 go back to the great depression of 1930s when recognition was tight and mortgages were difficult to sell. Therefore, in order to resuscitate the markets, the authorities had to step in to organize many ordinances and Torahs. Amongst them was the Banking Act of 1933 ( Glass-Steagall Act ) which made it illegal for any one establishment to organize any sort of combination of a commercial bank, anA investing bank and/or anA insurance company. TheA Gramm-Leach-Bliley Act of 1999 is anA actA of theA 106th United States CongressA ( 1999-2001 ) which repealed portion of theA Glass-Steagall Act of 1933, opening up the market amongA bankingA companies, A securitiesA companies and insuranceA companies. Booth ( 2009 ) argues that if Glass-Steagall jurisprudence would still hold been in topographic point the pure-play investing Bankss likeA Lehman Brothers, Citigroup and the insurance companies that were allowed to cover in securities like theA American International Group would non hold run into problem. Sorkin ( 2009 )

In the beginning of 2001, the involvement rates were 6 per centum when Alan Greenspan, the president of US Federal Reserve from August 1987 to February 2006, and his Fed governors saw a lag in the economic system due to the puncturing of the ‘dot com ‘ stock market roar in 2000 and the outgrowth of accounting dirts of Enron and WorldCom and therefore lowered the involvement rates Faber ( 2009, P. 13-19 ) . Due to seven separate cuts, involvement rates fell to 3.5 per centum by August 2001. Greenspan had to cut down the involvement rates sharply in 2001 due to the lay waste toing events of September 11 which had become a planetary issue. The involvement rates dropped to half, within three months. Borrowing cost had plummeted to degrees non seen in 50 old ages which continued till early 2007 due to the July 2005 bombardments in London ‘s conveyance system. Booth, et. Al ( 2009 ) & A ; BBC intelligence ( 2005 ) .

Harmonizing to Rowley ( 2009, P. 26-31 ) and Faber ( 2009, P. 13-19 ) , Easy money fuelled a house monetary value bubble and a rush in forces liability. Therefore, a debt bubble formed as money became about free if you could borrow it. Low involvement rates led to widespread rush in the liability throughout the US economic system. The rise in consumer debt reflected the response of consumers to the low involvement rates. In October 2008 consumer debt stood at $ 2.58 trillion. As the recognition footings tightened, following the fiscal crisis of September 2008, the leveraged impact on family ingestion became really crisp. Another ground for inexpensive recognition was the inflow of capital from China in the United States. US trade shortage is clearly reflected in China ‘s capital excess. US companies paid batch of money for goods made in China to derive competitory advantage and therefore doing the authorities ‘s inability to pull off the US trade shortage another major cause for the crisis. hypertext transfer protocol: //www.huffingtonpost.com/robert-weissman/deregulation-and-the-fina_b_82639.html

A bank is a topographic point that will impart you money if you can turn out that you do n’t necessitate it.A Bob Hope- Quote garden ( 2010 ) . A big figure of unscrupulous Realtors encouraged their clients to compose liar contracts, in which borrowers were encouraged to exaggerate their income and net wealth to measure up for higher mortgages taking to increase in Sub-prime loaning. The surplus of the lodging bubble therefore reflected a combined failure of private market and authorities bureaus finally necessitating the authorities and its independent bureaus to bailout the undeserving. For e.g. , the universe ‘s largest insurance company, AIG which had ventured foolishly and extensively into fiscal markets, was bailed out by the Bush disposal on the doubtful land that “ it ‘s excessively large to neglect ” – Rowley ( 2009, P. 31-35 )

I had a check returned earlier. “ Insufficient Fundss ” Mine or the Bankss? Pyers Symon- BBC intelligence ( 2008 ) . Shadow banking system has besides been responsibleA for adding to theA subprime mortgage crisisA and therefore finally the globalA recognition crunch. Harmonizing to Davidson ( 2009, P. 17 ) theA shadow fiscal systemA includes non-bank fiscal establishments that has a critical function in assisting concern by imparting money to run.

The low-wage economic systems that fuelled the bad finance were another cause- Manson ( 2009 ) . In the intervening decennaries, low-paying occupations ( service ) replaced high-wage occupations ( fabricating ) for instance- the most popular occupation in Michigan was to work in the eating house or a fast nutrient articulation. 155,000 people across the province started gaining their life this manner. Second in occupation conference tabular array was 150,000 store helpers and so came 108,000 tellers. Not one these businesss pay more than $ 10 an hr. Therefore due to low net incomes

Michigan workers have been gaining a pay that would non even raise a household of four. Now the inquiry arises if the rewards had fallen, how come people were still purchasing the Ford autos, Sony telecastings, Nike shoes etc. as we ca n’t hold mass ingestion if there are no high paying occupations? Manson ( 2009 ) believes that it came from recognition, like recognition cards, short term payday loans, zero per centum auto finance, and self certified mortgages etc. Therefore imparting money to people, who had no possible manner to return it on clip, turned out to be a bad determination.

The deductions of the fiscal crisis were immense. “ Today, there are three sorts of people: A the rich person ‘s, the poor person ‘s, and the have-not-paid-for-what-they-have ‘s ” Earl Wilson Quote garden ( 2010 ) . Harmonizing to BBC intelligence ( 2009 ) , the size of the existent per capita debt increased in George W. Bush ‘s disposal. Deficits had increased less under younger president Bush than they had during Reagan disposal. These shortages were besides an automatic consequence of recession and partially the side consequence of the war on panic after 9/11. In February 2009, the entire US federal debt was $ 12.35 trillion. Of this around $ 6.45 was held by the populace and $ 5.9 trillion in the signifier of intra-governmental retentions. The per capita load of debt approximately tripled from 1980 to 2008. Rowley and Smith ( 2009, P. 26-27 )

When written in Chinese the word “ crisis ” is composed of two characters – one represents danger and the other represents opportunity.A – John F. Kennedy ( 1959 ) – Quotegarden.com. The current fiscal crisis began in fiscal markets in the United States and its effects have spread into the existent economic system around the universe. Thus the response must besides be a planetary one, affecting all parts of society. The UK authorities can take the undermentioned stairss to cut down the danger of another crisis.

Harmonizing to the analysis of the Organization for Economic Co-operation and Development- OECD ( 2010 ) , Americans tend to pass more than they save. The UK and US have been marked by a combination of high debt degrees and low nest eggs rates in recent old ages. Therefore the people need to gain the importance of the nest eggs civilization. The Government should besides seek to promote people and reference this desperately through the reform of benefits and pensions systems to reconstruct the economic and societal benefits of a low clip penchant civilization.

SMEs aid in making occupations, support stableness, invention, macroeconomic growing and act as a growing engine and therefore play an built-in portion of developing and developed states. In OECD states [ Organisation for Economic Co-operation and Development- OECD is a set of 30 states who develop and discuss societal and economic policy ] . 95 % of the endeavors in the OECD states are SMEs which account for two tierces of entire employment and is besides the cardinal beginning of new occupation creative activity. In many states SMEs besides play a major function of economic recovery and aid to return to sustainable growing. In fact, some of the most advanced and fastest turning companies such as Wal-Mart ( 1962 ) , Starbucks ( 1971 ) , Microsoft ( 1975 ) and Virgin Atlantic ( 1982 ) were started during recessions.

The “ the London acme ” , a recent meeting of the universe leaders at the G20 acme hosted by Gordon Brown, will besides play an of import function in organizing and make up one’s minding new economic steps to get the better of the crisis. The UK authorities decided to implement the undermentioned stairss: it will forestall the prostration of the banking sector by supplying impermanent liquidness which will protect people and their nest eggs. Lower involvement rates will besides assist in increasing consumer ‘s demand which will in return support the economic system.

Government will besides back up investings in low-carbon substructure to undertake clime alteration and create inducements for companies to travel to a low-carbon economic system. The UK authorities truly believes in effectual passage to a low-carbon economic system which includes- a renewable displacement, research and development, commercial usage of the low-carbon autos and besides the skilled people needed to work in these countries. ACCA ( 2009 )

Mentions

Booth, P. et.al. 2009. Verdict on the Clang: Cases and policy Deductions. London, Great Britain, the Institute of Economic Affairs.

Davidson, A. 2009. How the Global fiscal markets truly work. London, UK & A ; Philadelphia, US, Kogan Page Ltd.

Faber, D. 2009. And so the Roof caved in. New Jersey, US, John Wiley & A ; Sons Inc.

Gerald, D. 2009, “ The Rise and Fall of Finance and the End of the Society of Organizations ” , Academy of Management Perspectives, Volume 23, Number 3, pp. 27 – 44

Mason, P. 2009. Meltdown: the terminal of the age of Greed. London, Great Britain, Verso.

Milne, A. 2009. The autumn of the house of recognition: what went incorrect in the banking and what can be done to mend the harm, Cambridge, UK, Cambridge University imperativeness.

Rowley, C. & A ; Smith, N. 2009. Economic Contractions in the United States: A failure of Government. Virginia, US. The Locke Institute.

Zandi, M. 2009. Fiscal Daze: A 360 Expression at the subprime Mortgage Implosion and How to avoid the following Financial Crisis. New Jersey, US, Pearson Education Ltd