Before 2008, if anyone told me a
new global financial crisis is on the way I would frown and laughed
at him right away. Even though Subprime mortgage failure caused a lot
of problems, it was still a regional crisis that wouldn’t be worse.
Many people had faith in their economy just like I did because the
booming stock market and housing market showed every signal of
another good year.
As
for China, we were going through the fastest economic growth since
1979. GDP increased by two-digital for 5 successive years since 2003.
Under such over-heated economic circumstances, the high inflation
became a new concern of the central government. The booming in house
market has become a buzz word for media for years. Since the surplus
from international trading increasing rapidly, billions of money
flowed in which result in huge amount of money injected into house
market.
However,
the bankruptcy of Leman Brothers surprised the world. Lehman Brother,
which once was the fourth biggest investment bank in US, is a
historic, trustworthy brand who survived two world wars and many
financial crises including the Great depression, but failed to make
it this time. The collapse sent a fear around world financial markets
(McKibbin) and it is this deadly domino that trigger the one
financial crisis we still suffering from.
For
everyone who lives in a modern world, financial crisis is not only an
economic term or a buzzword, it also related to everyone directly or
indirectly in every aspect of life.
One
reason that I want to dig more about the global financial crisis is
its consequences are devastating. As one part of the four stages of
economy, recession is always the one that ruins the wealth people
created in the past. Knowing the truth of it helps us gain a better
understanding of the economic circumstances in current and in the
past. And the lessons we get, guide us to run the business and make
decisions wisely. It will also allow us to predict the future
circumstances and prevent us from further loss.
When
talk about the causes of financial crisis or economic crisis, we
always come up with different idea like bubble in housing or stock,
unwise financial policies. However, the root cause of these entire
crises always lies there, greedy. Greedy is in our nature, that’s
why we take risk to purchase securities and stocks rather than put
money in an interest bearing account. Dating back to the 16th
century when the economic crisis came into our sight for the first
time, the Tulip bulbs was sold for 10 times of the annual income of a
craftsman before the bubble has burst in the spring of 1637 (Tulip
1). Capital shrunk, wealth vanished, homes down, those unlucky
spectacular lost everything in the tulip mania. Same with the Great
Depression which results from stock market bubble and any other
crisis, too, our greedy nature is the only devil that pushes us to
take risks, who always yells for more until failure gets the best of
us.
Another
cause of the global crisis is easy credit. It is no longer a daydream
to apply a new credit card or getting a loan from the bank for
purchasing a house if you do not have a very good credit history.
Because of the common desire of house ownership and various programs
of helping low-income having their own houses, the amount of subprime
mortgage lending is increasing rapidly each year. Investment banks
invest the money which is raised from their bondholders into this
subprime mortgage market and hoping for high return. Low-income
household get the money to make down payment for their dreaming home.
This is a win-win trade of all the entities on this chin. Until one
day, the borrower lost his job and could not pay back what he owes.
The bank, on one hand, is facing liquidity problem because it could
not get its money back from the loan borrower, on the other hand is
facing credit challenge because it doesn’t have enough money to pay
back its investors. Borrower loses his houses, bank is bankrupt, and
investor loses his faith in the economy: the end of the magic.
The
lack of financial regulation and supervisor is one of the
contributory factors for global financial crisis. US economy is a
typical example of free market economy. Individuals and institutions
make their financial decisions according to the information from the
market. People are reluctant to have the government or the Fed to be
the watchdog for their business activities and believe the market
will adjust to the best because of the powerful invisible hand.
However, just as James Madison once proposed” If men were angels,
no government would be necessary. If angels were to govern men,
neither external nor internal controls on government would be
necessary. “Similar to financial market, a world full of wealth and
temptations, without appropriate regulation, on stable and prosperous
economic environment is assured. Under such circumstances, financial
institutions are eager to take excessive risk to maximize their
profits without taking business or social ethic under consideration.
People made a fortune from trading different financial products.
However, they may never imagine that some of these profitable
derivatives they created became the monsters that are responsible for
this crisis.
The
slowdown or even negative growth in GDP is one sign to show how the
world economy is really affected by the crisis. Before the 2008
global financial crisis, the world average GDP growth is around 4.9%,
the growth rate of USA, Japan, China, Italy, and Euro area, France
and Germany in 2007 are 1.95%, 2.3%, 14.2%, 1.4%, 2.8%, 2.3% and 2.7%
respectively (GDP 3). While in 2008, the world economic growth slowed
down to 2.4%, which is less than half of the figure of the former
year. For most of the countries that are mentioned above, there is an
obvious decline in the growth rate. GDP of USA remained as the same
as 2007, however, negative growths were found in Italy and Japan
which were -1.3% and -1.2% respectively. Since GDP has always been
boldly treated as the sign of standard living, these changes revealed
that people’s living condition has been influenced by the crisis
directly: household wealth shrunk, spending contributed a smaller
part of the economy pie. As another very important part of GDP,
investment on the other hand fell sharply. For US alone, the equity
shock reduced investment by about 20 percent below baseline (McKibbin
67). Furthermore, the effect on net export and import also
dramatically large. It may explain why Japan’s GDP drop almost 3.5%
in 2008. Japan, as an island country, its economy is highly
imported-depended; any changes in international market will leave
deep influences on its economy. As the world second biggest export
country, China’s loss was big, too. For that record of April 2009,
year-on-year export declined by 20 percent (Cook 39).
The
high employment rate is one of the consequences that we concerned
most. US unemployment remained to be around 5 percent for almost 2
years. However, there was a significant climb in unemployment rate
since July 2007 (the month when subprime mortgage bubble burst) from
4.7% all the way to its peak 10% in Oct 2009.
One
thing draw my concern is the unemployment in youngsters whose ages
are around 16 to 24 is extremely high: almost double the average rate
in each episode. This indicates that in a bad economic environment,
youngsters who without much experiences or high education diploma are
among those who are easily to lose their jobs. It was a hush winter
for the new graduates, without qualified working experience and
skill; their job- hunting experience was extremely unpleasant.
The
unemployment rates in financial industry and export and import
industry are the highest. For example since the crisis, the export
producers in southern China collapsed, with spread company closures
and bankruptcies among small and medium enterprises in export
production supply chains. In December, official s reported around
670,000 small firm closures in 2008 with a loss of around 6.7 million
jobs, most of which were in Guangdong export hub(Tan 2008).
Furthermore, high unemployment rate also means more crime and
violence in the urban area.
Last
but not least, this global crisis also resulted in huge amount loss
in financial markets. Dow Jones industrial index reached to its peak
14,000 in Oct 2007, and then it entered a pronounced decline, which
accelerated markedly in October 2008. As the bubble burst, millions
of capital vanished in one night, people who bet a great deal on a
bull market lost everything. The collapse of the stock market was
also a shock to the companies. According to Forbes, for 2008 alone,
the world ten richest millionaires suffered big loss in their assets.
Almost 15 trillion dollar vanished from their pockets. In addition,
the loss of financial institutions was also significant.
The lack of
liquidity resulted in blocked withdraw. Furthermore, the bad loans
created $1 trillion on toxic assets for large us and European
banks from January 2007 to September 2009 according to the
International Monetary fund. In conclusion, after all the loss we
suffered from the global financial crisis. Till now, not every banks
get through the financial harsh winter. IMF also estimated that U.S.
banks were about 60% through their losses, but British and euro zone
banks only 40% (McKibbin).
After
digging into the surface of the global financial crisis, all the
knowledge and information I got help me to clarify the nature and the
consequences of the crisis. The world economy will recover from the
crisis sooner or later. However, we could not be too optimistic about
circumstances. The lessons we learnt from each crisis and recessions
are all treasure for to guide us in the future economic activities.
Remedies
for what has been cost by the crisis are essential to help us
recovery from the recession. The goal is to stop the economy from the
recession and in the mean time some adjustments should also be make
in order to improve the current economic structure. As
three main entities in the economy, consumers (investors), financial
institutions and Fed are all responsible for the crisis to some
degree.
As
an investor, we must do our homework about the economic environment
and gain more financial knowledge before making any decisions. The
insight of the economy is crucial to individual’s financial
condition. If investors lost faith in the economy, the recovery is
not assured. Then, regulation and wise fiscal policy can not only
bring the economy back to normal but also will be well prepared for
an reform to the current financial system.
Jiaxi
Sun
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