What Are the Significant Causes of the Global Financial Crisis - Coursework Example

GLOBAL FINANCIAL CRISIS Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction Global financial crisis has been of great impact in the global economy. It has led to instability in the global economy. Due to the global financial crisis, there ahs been continues risks in the global economy. There have been many issues concerning the GFC (Thikraiat et al 2012). Many policy makers are trying to find ways in which they can limit the GFC issues so that they manage the global stability. In the year 2008, the global financial crisis started in the US. It started when many individuals were awarded loans of which they were not eligible to get. This led to difficulties in collecting the loans back. In this effect, many banks became bankrupt as they could not collect their loans back. Other sectors such as insurance were also affected by the GFC (Thikraiat et al 2012). Many banks and other sectors in the economy led to financial crisis which spread to other parts of the world. Global economy is comprised of many countries which are connected together and these different economies depend on one another (Thikraiat et al 2012). Therefore GFC which started from the US spread to other economies in the world. There came up problems associated with GFC such as unemployment and unfavorable balance of trade among different economies. If GFC is not carefully managed, there are many repercussions which can come up. Many economies in the world have suffered problems in managing their financial issues. Depression has been a major issue due to GFC and the market operations have also declined. Many countries have had decline in their domestic products due to changes in international trade (Dabrowski 2008). For instance, Saudi Arabia which heavily depends on Oil has suffered decline in gross domestic products. This is because there has been decline in the global demand for oil hence the country does not have large markets to sale their oil products. This essay will discuss the causes of global financial crisis, the effects of the GFC on the Saud Arabian economy and finally it will discuss the effectiveness of the policies that the government of Saud Arabia has put in place to manage the repercussions of GFC. GFC is a situation where there is unstable balance in the economic sector. GFC has caused disruptions in the economic balance and as a result many economic sectors have also been affected. GFC is the unfavorable terms of trade in that there is no balance between demand and supply (Dabrowski 2008). The global financial crisis led to global recession between the years 2008 and 2012 which also led to financial crisis in the year 2009. Many governments are considering the ways in which they can develop strategies in order to effectively manage the repercussions of GFC. Monetary policy is the processes which are designed and implemented by a government of a country so that they can regulate the supply of money. Monetary policy is aimed at promoting economic stability and growth of an economy (Abdurrahman 2012). Under monetary policy, there are various tools which can be applied so that they can manage the supply of money. These tools include increasing the interest rates lowering the base for the monetary supply and increasing the reserve requirements. Monetary policy is normally implemented by the central bank in any given economy. Causes of global financial crisis There are various causes which have led to GFC. The firs cause of the global financial crisis is the changes in global systems called the capitalism. Many people believe that all these problems in the global economy is associated with capital systems approach to finance (Abdurrahman 2012). Many organizations and investors invested in the financial derivatives and did not consider the real economy and this affected the various sectors in the economy. The capitalists believe that any depression in the economy will recover itself. This call for intervention from the government or else there will be economic depression. Another cause for GFC is the excessive use of electronic money. The use of computers and other computer aided designs have led to easier communication and also easy exchange of money (Abdurrahman 2012). This increased the lending rates although to some extent some creditors failed to repay their loans. This led to financial crisis as many financial institutions became bankrupt. Thirdly, there were no adequate strategies for managing the monetary policy. Some economies were much concerned with developing strategies so that they can avoid economic crisis (AMF 2010). The strategies did not work well and as a result, there was unfavorable reflection on some world economies. For instance, US reduced its interest rates so that they can encourage economic growth. Fourthly, financial derivatives also led to GFC. Derivatives help to increasing funding to an economy. This implies that there has to be increased mortgages which are held in order to act as guarantee for loans (Zarrouk 2011). When the prices for mortgages go down, the economy also declines which greatly influences the economic stability. This led to issues in the global economy. Repercussions of GFC on Saudi Arabian economy Due to GFC, there have been effects on the economy of Saudi Arabia. The first effect is the decline in the gross domestic products. Most of the Saudi Arabian economic sectors were affected and there was market crash and depression. Saudi Arabia greatly relies on Oil products for their economy for about 70%. Due to global financial crisis, the oil market was affected thus the economy of Saudi Arabia declined and went under depression (May & Abdelhak 2010). The price of oil dropped and the price for barrel was $ USD 71. This affected the gross domestic product of Saudi Arabian economy. Secondly, many economic sectors were affected by the GFC. The industrial sectors changed due to changes in the corporate sectors. There was deceleration in sectors such as transportation and decline in consumer consumption in various sectors (May & Abdelhak 2010). Therefore the economy of Saudi Arabia declines which also affected the living standards of the people of Saudi Arabia. GFC also led to issues in the market conditions like borrowing and lending facts. The Saudi Arabia stock exchange market was affected which also influenced its performance. The investors lost confidence hence there was mass sale of the shares. The sale of shares was more than the demand which led to market crash. Finally, GFC led to depression of the economy of Saudi Arabia. The main effect was that many financial organizations were affected (Zarrouk 2011). The profitability of these institutions declined. The availability of loans to investors also declined which led to decline in investments. This led to decline in the economic growth of Saudi Arabia. Actions taken by Saudi Arabian government The government of Saudi Arabia has set various strategies which it can use to manage the repercussions of GFC. The first policy is to reduce the value of the bonds and also lowering the interest rates. This is aimed at attracting the investors into the Australian economy so as to improve the performance of the economy by investing into viable projects (Islamic Developmnet Bank 2009). The Supreme Economic Council made an announcement that affects the local market that there was a plan by the government to guarantee local deposits. In addition, the government of Saudi Arabia under the ministry of finance created cash deposits which were both in local currency and also in USD. This helped in local funding and also helped to improve liquidity in various sectors in the economy which led to improved economy. Finally, the government of Saudi Arabia improved on the monetary policy. The government through the central bank regulated the supply of money and encouraged stability in the investments. These policies designed by the government of Saudi Arabia enabled the economy of Saudi Arabia to improve on its economical performance (Zarrouk 2011). The key indicators of these policies include increase in gross domestic products, increase in employment rates and also low rates of inflation. The value of shares increased to 31.4% that is 250 million in the year 2008 to 1325 million in the year 2011. Also gross domestic products increased to 35.5% in the year 2007. The unemployment rate further declined by 13%, 10% and 7% in the years of 2009, 2010 and 2011 respectively. Conclusion Global financial crisis has been a major issue in the global economy. There are main causes of the global financial economy. They include capitalism approach, financial derivatives, increased electronic money use and lack of effective implementation of monetary policy. The global financial crisis has affected the economy of Saudi Arabia greatly. The effects of GFC include reduction in gross domestic products, negative influence on other sectors of economy such as transport and market crash and depression. On the other hand, the government of Saudi Arabia has put in place various strategies so as to avoid GFC. These policies include reducing the value of the bonds, availability of local deposits and effective management of money policy References Abdurrahman, A. (2012). The Global financial crisis: impact on Saudi Arabia, Sage publications AMF. (2010). Repercussions of the global financial crisis on the economies of the Arab Countries. United Arab Emirates. Dabrowski, M. (2008). The global financial crisis: Crisis values, anti crisis policies and First lessons, CESifo Forum, Vol. 9, No. 4, pp. 28-73. Islamic Development Bank. (2009). Impact of global financial and economic crisis on Oic member countries, Islamic development Bank. May, K. & Abdelhak, S. (2010). Impact of the global financial crisis on the Gulf Co operations council countries and challenges a head, Middle East and Central Asia department. Thikraiat, S., Shatha A. & Ruba Abu, S. (2012). Causes of the Global Financial Crisis and It’s Effects on the Arab Countries, Canadian Social Science, Vol. 8, No. 6, 2012, pp. 153-159. Zarrouk, J. (2011). The Global Financial Crisis and Channels of Influence on the Economies Of the Arab Countries. Arab Monetary Fund. Read More