Policy Directions for the Effects of the Global Financial Crisis - Example

Briefly describe the nature of the recent Global Financial Crisis (GFC). Name: University: Course Title: Instructor: Date: Table of Contents Table of Contents 2 Executive Summary 4 Introduction 4 Policy directions for the effects of the Global Financial Crisis 5 Conclusion 10 References 12 Alabi, R A et al. (2011) Africa and the Global Financial Crisis - Impact on Economic Reform Processes. Berlin: Lit Verlag Publishers. 12 Arnon, A et al. (2011). Perspectives on Keynesian Economics. London: Springer Publishers. 12 Berkmen, P et al. (2009). The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact. Washington: International Monetary Fund. 12 Carbaugh, R. J. (2011), International Economics, Mason: Cengage Learning Center Publishing. 12 Ciro, T. (2012). The Global Financial Crisis: Triggers, Responses and Aftermath. Surrey: Ashgate Publishing Limited. 12 Demirgüç-Kunt, A et al. (2011). The International Financial Crisis: Have the Rules of Finance Changed. Danvers: World Scientific Publishing Limited. 12 Dieter, H. (2010). Exploring Alternative Theories of Economic Regionalism: From Trade to Finance in Asian Co-operation. Review of International Political Economy. Vol.10(3) pp. Orr, S. (2010). Post Global Financial Crisis International Business Strategies. International Review of Business Research Papers. Vol 6(4) pp. 324 – 336. 12 Dolezalek, H. (2012). The Global Financial Crisis. Edina: ABDO Publishing Company. 13 Guppy, D. (2011). Guppy Trading: Essential Methods for Modern Trading. Milton: John Wiley & Sons Australia Publishers. 13 Hardy, D. C. L et al. (2008). Cross-Border Coordination of Prudential Supervision and Deposit Guarantees. Washington: International Monetary Fund. 13 Kolb, R. (2010). Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Hoboken: John Wiley & Sons Inc. 13 Laeven, L et al. (2010). Lessons and Policy Implications from the Global Financial Crisis (EPub). Washington: International Monetary Fund. 13 Morgan, R. (2009). Lessons from the Global Financial Crisis: The Relevance of Adam Smith on Morality and free Markets. Lanham: Rowman & Littlefield Publishing Group Inc. 13 Muller, D. K & Grenier, A. A. (2011). Polar Tourism: A Tool for Regional Development. Quebec: Presses de l’Universite du Quebec. 13 Reddy, Y. V. (2010). India and the Global Financial Crisis: Managing Money and Finance. London: Anthem Press. 14 Schwab, K. & Porter, M. (2008). The Global Competitiveness Report 2008–2009. Geneva: World Economic Forum. 14 Shrivastava, P. & Statler, M. (2012). Learning from the Global Financial Crisis: Creatively, Reliably, and Sustainably. Stanford: Stanford University Press. 14 14 Executive Summary This report addresses various aspects involving global financial crisis and various policies that are related to it. According to the report, financial crisis affected almost every institutions and assets. The report also analysis various factors that led to financial recession in the world and US in particular. The report also discusses a number of strategies as well as policies that different countries in the world can undertake which are aimed at addressing the effects that the global economic crisis. Such include creation of common currencies that would be used as mediums of exchange in the participating countries. Introduction Financial crisis has been used widely to explain a number of circumstances where some financial institutions and also financial assets face significant losses in their value. Financial crises are in most cases associated with panics that occur in financial sectors like the banking sector (Dolezalek, 2012). In most cases, the financial crises normally coincide with recessions or depressions. If in any case a financial crisis not followed by either a recession or also a depression, it would not lead to significant changes in the real economy of a country. The global financial crisis started with the emergence of mortgages being given by banks to people in the United States of America (Morgan, 2009). These mortgages were issued to people who needed to procure homes that were out of their financial reach (Ariff et al, 2012). In the most recent financial crisis, brokers sold mortgages at lower rates that enticed home buyers in the United States with the variable rates which made it possible for most people to become homes owners. The banks responsible for these mortgages had an understanding of the risks that were involved in the venture. Hence, they started pushing the risks out of themselves to other financial institutions through loans, mortgages and other arrangements, which were later sold in the markets (Hankel & Isaak, 2011). By the mid of the year 2006, the prices of homes in the USA began to fall at a very high rate while interests on mortgages increased. People became unable to repay their loans. They defaulted in the repayments of their monthly instalments (Kolb, 2010). This led to major losses being recorded in banks and brokerage firms of the United States (Shrivastava & Statler, 2012). This led to the spillage of the crisis to other sectors of the economy. In a short time, it went to other countries of the world (Shiller, 2008). Are there any policy directions that can be undertaken by trading countries in order to curb the effects of global financial crisis? This paper suggests policies of addressing the effects of the global financial crisis. Policy directions for the effects of the Global Financial Crisis There are a number of strategies that different countries in the world can undertake which are aimed at addressing the effects that the global economic crisis has had on them (Berkmen et al, 2009). These strategies are mostly drafted while putting under consideration the theories that underlie their construction (Kates, 2011). One of the strategies is policies that enhance the stimulus that the governments of such countries inject in the economy. These are based on macroeconomic theories that are aimed at encouraging the return of the economies of countries faced with the financial crisis to faster growth and at the same instance lowering the rates of unemployment. These macroeconomic theories borrow heavily on the Keynesian theories, which discuss on the theories of employment, interest and money. According to the modern macroeconomic theories that are founded from the Keynesian theories, the injection of stimuli by the government on the economy would mean that more people would get employment and alternative sources of income. This would lead to the improvement of the overall economy (Kates, 2010). According to the Australian Bureau of Statistics, the rate of employment is one of the key economic indicators. Therefore, the Australian government came up with strategies that ensure that the rate of unemployment remains at very low levels so as to enhance the growth of the economy. According to the latest statistics from the bureau, the rates of unemployment have remained steady at a rate of 5.2 percent as per march, 2012. The numbers of employed people have been steadily increasing while that of the unemployed has been decreasing. In fact, the number of employed people increased to 11,490 from 44,000 for the same month while that of unemployment fell from 3,200 to only 629. This has seen the growth of the country’s gross domestic product and the overall economy at large (abs.gov, 2012). Policy directions could also be made towards the needs that belong to the home country before considering the needs of other countries. This is supported by the porter’s theory of competitive advantage that dictates that internationalisation ought to be kept as an idea that is less attractive to the home country during the global financial crisis and even immediately after it has ended (Schwab & Porter, 2008). The theory talks of the features of the country such as the local industry supports and the government as the most essential factors when making considerations on whether to internationalise or not. This is to be continued until the host country feels that it is in a position where it can feel that it has fully recovered from the impacts of the crisis. This can be said to be the mercantile policy (Muller & Grenier, 2011). It had been experienced in many countries of the world, with maybe the exclusion of china. Here, the country is meant to start by focussing on the current pressures that it undergoes before considering that of neighbouring countries and even other countries that it formerly engaged in trade with (Orr, 2010). Another policy direction for combating of the effects of the global financial crisis would be in terms of the creation of common currencies that would be used as mediums of exchange in the participating countries (Laeven et al, 2010). This is the monetary regionalism theory that calls for the full participation of countries that are willing to engage in the policy (Arestis et al, 2003). It aims at the contribution to the stability of currencies and also the financial markets of a region. This is without the actual formalisation of trade links. These regions are like those of the European Union. They can come up with policies that are a form of packages that bail out member states that have been impacted by the global finance crisis. This could be through the creation of schemes that are depositor guaranteed for the financial institutions and also banks in all the member countries. The member states would then provide a form of deposit guarantee for their respective banks and other financial institutions (Hardy et al, 2008). There would also be the provision of wholesale guarantees by the depositor guarantee that would allow for wholesale guarantees by the banks and financial institutions for only targeted, practical and also necessary guarantees. This would counter the adverse effects of the global financial crisis in the individual nations in the founded regions (Dieter, 2010). This took place in the European Union in the year 2008 where the depositor guarantee for states that were its members was increased from 20,000 to 50,000 Euros and later up to 100,000 Euros. This led to a reduction of the meltdown that the banks in the member states faced as a result of the global financial crisis of the time. The success of the policy later led to its extension to other countries that are members of the European Economic Area such as Norway, Liechtenstein and even Iceland (Ciro, 2012). This can be represented using the graph below: Source: Carbaugh, 2011. According to the graph, the creation of these unions leads to situations where there is an increase in welfare creation effects and a reduction of effects that leads to welfare diversion. Hence, the welfares of the member countries would depend on the strength of these unions. Other policies that nations can take to address the impacts of the global financial crisis would be expansionary policies which are designed to offer an effective response to the crisis (Dolan, 2011). These might be viewed as being the same with the economic stimulus programmes. They are policies that are aimed at boosting the demand and the overall expenditure of the population of a country. These programmes, like those that were initiated in Australia, aimed at providing the people with low incomes with bonus cash. This was aimed at making them have the capability of spending more. The bonus was initially small but later, the amounts were increased. The initial full amount of the bonus was ten billion Australian dollars, which was later increased to forty two billion in the form of National Building Economic Stimulus Plan. This can be coupled with reduced interest rates so as to make it affordable for the people in a country have the capability of comfortably repaying their loans. An example here is the Bank of England that reduced its lending rates from 1.5% in early 2009, then later to 1.0% in February of the same year and later on to a further drop to 0.5% in March of the same year (Ciro, 2012). There are also policies that could enhance the protection of investors that could be undertaken in order to curb the effects of the global financial crisis (Guppy, 2011). This could be where the government comes up with policies that are aimed at indicating to the investors in the country and also other potential investors that their investments would be offered protection by the government. There could also be the formation of institutions that are innovative and have the presence of both the public and the private individuals in their management that work to ensure that the policies that are created are to the benefit of all stakeholders in the development of a country’s economy (Reddy, 2010). This would also play a role in the promotion of protectionism in the country (Arnon et al, 2011). This would be such as the introduction of tariffs that favour investors like lower tariffs on raw materials and higher taxes on finished products. This could be as shown in the table below: Source: Carbaugh, 2011. Additionally, international lending institutions could come up with strategies that aim at increase the lending that it offers to countries that have been harshly affected by the crisis. This could also include the developing nations so as to ensure that they get out of the crisis in a fast and also sustainable manner (Alabi, 2011). This could also be coupled with the reduction of the rates of the loans that these institutions such as the International Monetary fund give to such countries (Reddy, 2010). Conclusion The impacts of the global finance crisis were experienced in many countries of the world. The rates at which these countries were hit by the crisis were also different. Therefore, it meant that individual countries came up with different policies that aimed at countering the effects that the crisis left them with. Most of the countries and even the companies that operate in these countries were forced to change the ways in which they operated so as to cope with the crisis. In other countries, some companies that operated there were forced to shut down completely. Others downsized on the number of their employees. There are strategies that can be taken by a number of countries and companies in the countries while there are others that can only operate in specific countries. Coming up with the strategies for combating the effects of the global finance crisis are cross-cutting and requires the active involvement of all players in the economy of nations. It also calls for the inclusion of international financial institutions (Demirgüç-Kunt, 2011). References Abs.gov. (2012). Australian Bureau of Statistics. Retrieved on 16th April, 2012 from http://www.abs.gov.au/ Alabi, R A et al. (2011) Africa and the Global Financial Crisis - Impact on Economic Reform Processes. Berlin: Lit Verlag Publishers. Arestis, P et al. (2003). Globalisation, Regionalism and Economic Activity. Cheltenham: Edward Elgar Publishing Limited. Ariff, M et al. (2012). Regulatory Failure and the Global Financial Crisis: An Australian Perspective. Cheltenham: Edward Elgar Publishing Limited. Arnon, A et al. (2011). Perspectives on Keynesian Economics. London: Springer Publishers. Berkmen, P et al. (2009). The Global Financial Crisis: Explaining Cross-Country Differences in the Output Impact. Washington: International Monetary Fund. Carbaugh, R. J. (2011), International Economics, Mason: Cengage Learning Center Publishing. Ciro, T. (2012). The Global Financial Crisis: Triggers, Responses and Aftermath. Surrey: Ashgate Publishing Limited. Demirgüç-Kunt, A et al. (2011). The International Financial Crisis: Have the Rules of Finance Changed. Danvers: World Scientific Publishing Limited. Dieter, H. (2010). Exploring Alternative Theories of Economic Regionalism: From Trade to Finance in Asian Co-operation. Review of International Political Economy. Vol.10(3) pp. Orr, S. (2010). Post Global Financial Crisis International Business Strategies. International Review of Business Research Papers. Vol 6(4) pp. 324 – 336. Dolan, B. (2011). Currency Trading for Dummies. Hoboken: John Wiley & Sons Inc. Dolezalek, H. (2012). The Global Financial Crisis. Edina: ABDO Publishing Company. Guppy, D. (2011). Guppy Trading: Essential Methods for Modern Trading. Milton: John Wiley & Sons Australia Publishers. Hankel, W. & Isaak, R. (2011). Brave New World Economy: Global Finance Threatens our Future. Hoboken: John Wiley and Sons. Hardy, D. C. L et al. (2008). Cross-Border Coordination of Prudential Supervision and Deposit Guarantees. Washington: International Monetary Fund. Kates, S. (2010). Macroeconomic Theory and its Failings: Alternative Perspectives on the Global Finance Crisis. Cheltenham: Edward Elgar Publishing Limited. Kates, S. (2011). The Global Financial Crisis: What Have we Learnt. Cheltenham: Edward Elgar Publishing Limited. Kolb, R. (2010). Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Hoboken: John Wiley & Sons Inc. Laeven, L et al. (2010). Lessons and Policy Implications from the Global Financial Crisis (EPub). Washington: International Monetary Fund. Morgan, R. (2009). Lessons from the Global Financial Crisis: The Relevance of Adam Smith on Morality and free Markets. Lanham: Rowman & Littlefield Publishing Group Inc. Muller, D. K & Grenier, A. A. (2011). Polar Tourism: A Tool for Regional Development. Quebec: Presses de l’Universite du Quebec. Reddy, Y. V. (2010). India and the Global Financial Crisis: Managing Money and Finance. London: Anthem Press. Schwab, K. & Porter, M. (2008). The Global Competitiveness Report 2008–2009. Geneva: World Economic Forum. Shiller, R. J. (2008). The Sublime Solution: How today’s Global Financial Crisis Happened, and What to do about it. Oxfordshire: Princeton University Press. Shrivastava, P. & Statler, M. (2012). Learning from the Global Financial Crisis: Creatively, Reliably, and Sustainably. 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