Causes of Global Financial Crisis, Impacts of Global Financial Crisis on Saudi Economy - Literature review Example

Global financial crises Name Professor Institution Course Date Global financial crises Introduction Global financial crisis is one of the issues that have been debated strongly across the globe. The initial signs of the global financial crisis manifested in late 2008 in the US and shifted rapidly to majority of the developed markets and then stretched globally (Attia, 2010). According to Abdullah (2009) the results of the crisis faced nation at a varying speed and intensity of effects in accordance to the level of openness of their market in the world economy. It also affected according to various factors, and has replicated the crisis rapidly and directly on the financial industry and banking indicators. In United States alone, Banks were faced with bad loans in prime mortgage market. The research shows that in 2008, numerous financial challenges were revealed in some bigger banks in the US that resulted to a credit markets freeze, leading to the Global financial crisis and a global economic recession (Davidson, 2009). If one considers the Global financial crisis to not yet over, then rationale being the issues to do with sovereign debt problems in numerous European nations, as well as Ireland and Greece, where states have been assisted monetarily by Eurozone member states (Attia, 2010). There exist uncertainty concerning global economic expansion, and the interest rates stay at record lower levels in several nations to attempt to improve economic growth and shun another global recession. Siddiqi (2009, p.46) asserts that the US has been employing a quantitative easing approach (money printing) to attempt to enhance its economy. However if the real cause and effects are known and dealt with, then it will be difficult to address this which still threaten the every sector of the economy. In light to this realization, this paper seeks to address the significant causes of global financial crisis, the repercussions of global financial crisis on the economy of Saudi Arabia and how effective the government policies are tackling its repercussions. Global financial crisis Global financial crisis is defined as the situation where the worldwide economy undergoes an unexpected downturn resulted by the financial problems (Abu Hammour, 2009). An economy experiencing economic troubles will most probably face a declining GDP, increasing or declining prices because of inflation or deflation and a drying up of liquidity. The economic problems may assume the form of a depression or recession. Sometime it is referred to as a real economic crisis. Attia (2010) contends that during the worldwide financial crisis, it is hard to succeed in a business environment because prospective customers tend to cut the purchases of products and/or services till the economic condition improves. Monetary policy Since the financial issues are concerned with money, monetary policy can never be left alone. Monetary policy is defined as the process where the state monetary authority set laws that control the money supply, frequently done towards a rate of interest in order to promote economic stability and expansion (Abdullah, 2009). The official objectives normally integrate low unemployment and fairly stable prices. Money markets offer an insight into the way one can craft the best monetary policy. The monetary policy, significantly, is the expectations management. According to Abdullah (2009) monetary policy is liked to correlation between the interest rates in a financial system, specifically, the price in which an individual can borrow money, and total money supply. Causes of global financial crisis The characteristics of a global financial crisis of 2008 started to emerge in the US in the middle of 2007 with problems in the real estate industry the together with no payment of mortgage loans given to people who do not have sufficient to return (Land, 2009, p.58). The crisis which began as US sub-prime challenges in 2005 fats turned into global and resulted to a total fall of international inter-bank lending at the time Lehman Brothers applied for bankruptcy in 2008. The crisis has changed these favorable situations, leading to dramatic effects for the developing nations (Davidson, 2009). It is a difficult work to establish the major causes of the financial crisis. However, Abdul (2009) stated that a combined impacts of several factors resulted into the sudden increase in the credit market coming from the US which was followed by other parts of the world. The main causes of the global financial crisis can be classified into two reasons; internal and external reasons (Abdul, 2009). Under the internal there are reasons such as then existence of the capitalist system, the dollar standards, Basel Convention Control of the Banks, Interest Rate, and Concentration of Credit in One Sector, finical derivatives, the GDP structure and electronic money (Attia, 2010). It has been highly stated by numerous newspapers across the globe that "When the US sneezes, the entire world catches cold." The US was the leading economic powerhouse in the world in the part of the 20th century (Abdul, 2009). Various economists think that the cause of global crisis took place due to presence of a capitalist system in the US and attempt of the consumers to realize substantial and rapid profit by choosing to invest in the financial instruments as opposed to the real economy. Dollar remains the global standard currency for evaluating business transactions. According to Siddiqi (2009) the US had offered the global market from the dollar at the time when the interest were low rates and which resulted rise the value of international liquidity and debt accumulation to the US. Even though the Basel Convention resolved that banks should be controlled by the policies set by this convention (Attia, 2010). However, the policy did not cover the Federal Reserve Bank of the US. Abdul (2009) argues that this resulted to banks expansion in terms of lending to more over sixty times the level of the capital and thus increases the level of debt and risks of defaulting of creditors to the premiums because of the lack of effective controlling by the Federal Reserve Bank. The rise and fall of the interest rate in the US also caused the world financial crisis. The interest rates influence on the decision making of the people with regards to macroeconomic, consumption and saving (Abu Hammour, 2009). The US policy on the interest rate has varied, in implementing a lower rate of interest on loans taken in 2000 to persuade the national to acquire loans for the house owners the resulted to the improved amount of loans given to the nationals. Also the US policy again increased the rate of interest on the deposits in 2006-2007 causing high interest rates on loans, therefore increasing burden on the borrowers and fault of their capability to pay back (Davidson, 2009). The US recommenced its policy of lowering the rate of interest on loans once again, hence raising the amount of loans given to its citizens. The low interest rates encouraged the citizens to take further loans. Even as this was going on, the loans taken before had not been repaid, this also caused global financial crisis. One external reason that led to global financial crisis is the Euro on the Standard of dollar and the trading system debt (Davidson, 2009). The rise of the euro owing of linking key European currencies to everyone and down in the low percentage as a result of the capability of financial investors to impact some of the globe’s economies by means of floating currency and liberalization of the interest. Impacts of global financial crisis on Saudi economy  Global financial crisis was one of the worst occurrences in the world. Abu Hammour (2009) posits that prior to the situation, Saudi economy was one of the economies that were doing well in the period between 2004 and 2004 according to the global standards. The real average real GDP growth of Saudi at this time was rated at 4.4%, while average government monetary surplus at 19% (Siddiqi, 2009, p.46). This mini improvement drove all sectors of the economy, but particularly the banking industry, which gained strongly from rising and falling of the economic situation and a high level of state spending. In brief, this positive economic status strengthened the great banking sector performance in 2008 and 2009. Unfortunately, this is the time the world experienced financial crisis and the Saudi economy was also affected. Majority of the Arab stock markets indicators sharply declined causing losses in the banking industry in the Arab economy. Siddiqi (2009, p.47) asserts that this crisis also had an impact on the real estate industry which experienced a drop in the demand for the commercial and residential structures in numerous Arab nations, particularly in the real estate projects. Also, the impacts of the financial crisis on the Saudi economy were by means of the macroeconomic indicators developments and financial depth indicators. In 2008, the indicators declined in Saudi economies in which the Gulf Cooperation Council (GCC) state dropped to the lowest climax in the stock market of Dubai, which declined by up to 60% by 2007 (Land, 2009, p.58). This is because of the openness level and relationship between the US and high capital markets. The global financial crisis also caused a reduced demand for credit from various business sectors since numerous companies were re-assessing their strategies with regard to decline in global demand of products and services. How effective the government policies are in tackling global financial crisis repercussions In reaction to global financial crisis, Siddiqi (2009) claims that the governments through central banks took various measures to resolve the crisis and put financial economies and markets. Central banks and governments have raised their intervention levels as the condition got worse. They have salvaged systemically significant financial institutions so as to stop a total decline of the financial markets. Siddiqi (2009) argues that all through 2007-2008, the US Federal Reserve committee reacted to the rising crisis with numerous reductions in the rates of interest and major capital injections into the falling financial system, as well as banks and non-banking financial companies (Land, 2009, p.59). In the US, The Obama’s government planned a critical financial recovery mechanism, a form of economic new deal bringing together government tax cuts and reduction in spending (Attia, 2010). These strategies have been slow but very effective because it has bailed out several firms which collapsed. In Europe, central banks and in particular the European Central Bank (ECB) have lent extremely to banks which experienced the fading of inter-bank lending so as to present them with needed liquidity. Land (2009, p.57) claims that as the central banks used all the intervention measures (for instance, cutting reserve prerequisites and lowering interest rates) and yet some crisis were noticed, they embarked on QE/CE method by purchasing non-government and government debt in addition to by widening the scope of entitled collateral. However, Saudi Arabia was not required to take any steps in support of the foreign currency financing of corporations or banks because Saudi banks’ asset or liability is fairly conservative (Siddiqi, 2009). According to the U.S. National Bureau of Economic Research, the US recession which started in 2007 ended in 2009 and the global financial crisis looked to have come to a conclusion nearly at the same time. In a nutshell, the intervention measures were effective (Attia, 2010). Conclusions The current global recession is the consequences of the financial problems which started in the US mortgage market and expanded to the other parts of the globe. Nevertheless, this alone may not have been adequate to cause the crisis: the real issue was which the risks entailed in this mortgage problem was temporarily concealed since they were on-sold by means of complex financial instruments. Economists had listed several factors for the crisis, perhaps because they were no obvious causes. However, the ending of the crisis can be attributed to the collaboration of the large economies through different intention so as to end crisis that threatens to collapse every corporate sector. References Abdul Latif, A. (2009). The Reasons for the Global Financial Crisis, the First Conference of the Faculty of Economics and Administrative Sciences: Hashemite University Abdullah, K. ( 2009). The International Financial Crisis. Middle East Studies Center. Abu Hammour, M. (2009). The International Financial Crisis. Jordan: Middle East Studies Center. Attia, M. (2010). The Global Financial Crisis and Its Impact on Financial Markets. House of university education. Egypt. Davidson, A. (2009). How the Global financial markets really work. London: UK & Philadelphia, US, Kogan Page Ltd. Land, T. (2009). The Middle East counts the cost of the recession. The Middle East (01/2009), pp. 58–59. Siddiqi, M. (2009). Surviving the international crisis. The Middle East (01/2009) pp. 45–48. Read More