Global financial crisis
is an economic situation where both markets and consumer faces difficulty in
business environment since capable consumer tends to reduce the purchase of
goods and services until the economic situation improves. Financial crises can cause
massive loss in income, unemployment and output loss. In the history of mankind
there are 5 major financial crises faced by the world namely The Credit Crisis
of 1772, The Great Depression of 1929-39, The OPEC Oil Price Shock 0f 1973, The
Asian Crisis of 1997 and The Financial Crisis of 2007-08. Among these five
major financial crises the two most devastating financial crises are The Great
Depression of 1929-39 and The Financial Crisis of 2007- 2008. The Great
Depression of the 20th century lasted 10 years and believed to be
triggered by the fall of wall street in 1929 and the bad policy of U.S.
government. Great depression resulted in huge loss of income, highest
unemployment rate recorded of 25 percent in 1933 and highly affected the
industrial sectors. The Financial Crisis of 2007-08 was said to be the most
devastating global financial crises after the Great Depression. It caused the
downfall of many financial markets all around the world. It was caused by the
collapse of housing sector in the U.S., the crisis caused the fall of one of
the biggest investment banks in the world of Lehman Brothers, it brought many
financial institutions to the edge. The financial crisis of 2007-8 almost took
a decade to recover. (ENCYCLOPEADIA
BRITANNICA, 2018)

 

Financial Crisis is a
situation when the price of the assets suddenly decreases causing an impact in
financial markets and disturbing markets capacity of collecting capital. There
are varied types of situation that can cause a financial crisis. (SSRN,2013) The most common reason for a
financial crisis are banking crisis, currency crisis, speculative bubbles and
crashes, and wider economic crisis. Banking crisis also known as Bank panic is
a situation of bank run i.e. a problem faced by the bank when there are sudden
withdrawals by customers. Since bank lends most of the deposit and with the
sudden withdrawal by depositors, bank cannot quickly return the sudden demand
causing the customer to lose their deposit which also cannot be recovered by
the banking insurance. The widespread if bank run can cause the financial
instability worldwide.  A currency crisis
is a situation caused when the fixed exchange rate of country breakdowns or
when the currency goes into a free fall. 
Speculative bubble is a scenario wherein the marketplace rate of
investment devices or different properties has risen to a degree which exceeds
reasonable valuation and is not sustainable. If there is a bubble, there is
possibility of crashes. Consumer will continue to buy if they think other will
buy, and when they decide to sell there is a huge fall in price causing a
financial crisis. Wider economic crisis is a situation in which a country faces
an economic downturn caused by consecutive fall in GDP, unstable capital
collection because of increase/ decrease in price due to inflation or
deflation. It can take the form of recession or a depression.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Financial crisis can be
caused by various reason some of the major contributor for the financial crisis
are leverage, asset-liability mismatch, uncertainty and herd behaviour,
regulatory failures, contagion, recessionary effects. Leverage is considered
one of the major and common cause for financial crisis. (CAPITAL INSTITUTE, 2011) Leverage refers to financing strategy of
borrowing money. When a financial institute make an investment of the borrowing
it has the chance of either higher return or a risk of liquidation. Since there
is chances of liquidation or bankruptcy the firm may not be able to payback its
leverage causing a financial unbalance. Asset-liability mismatch is another
cause of financial crisis. It’s a situation that cause the bank run i.e. when
depositor suddenly decide to withdraw their funds and bank cannot return the
demand on time causing a financial crisis. Uncertainty and herd behaviour is
another cause of financial crisis. This kind of financial crisis is caused by
the lack of knowledge and wrong investment decision. When a market makes a
wrong decision, or invest without calculating the future consequence it can
create a financial crisis. Regulation is process used by the government to
prevent any financial crisis that may arise by making the financial state
available to the public. Therefor financial crisis may arise when the no or
inadequate regulation. (PositiveMoney,2017)
Contagion can be added as another cause of financial crisis. The main idea
behind contagion is that the financial crisis may spread for on organization to
another. For instance, when a financial state of an organization downturn its
may results in downturn of another institution causing a chain reaction and
ultimately resulting a global financial crisis. Recession refers to decrease of
Gross Domestic Product (GDP) for two or more consecutive year. It causes high
unemployment rate and increase in national debt. Recession effect is also
believed to be cause of financial crisis.

Financial Crisis of 2007
to 2008 also known as global financial crisis was the most devastating
financial crisis and market worldwide had to suffer its impact for many of the
following year. The financial crisis of 2007-8 was ignited by the downfall of
the U.S. housing market and the fall of the biggest investment bank of Lehman
Brothers (Amadeo. K, 2018). Since
then many plans and polices when put into action to prevent the financial
crisis however soon after the financial crisis followed the Great Recession and
the European debt crisis. As the history shows we can assume that in case of
financial crisis there will always be another one and its will always be
different than the previous one. The world is bound to face the financial
crisis however we cannot pinpoint when and where how it will happen. The
current financial state of the world is bigger than it was a decade ago, there
is credit bubble in all most every financial market. The consumers are totally
dependent upon the financial institution. The bank easily provides debit cards,
insurance companies provide higher insurance, etc. The credit bubble is
expanding every year however when the credit bubble reaches its limit it will
cause another big financial crisis because the debt today is greater than of
2007. According to the Federal Reserve Chair Janet Yellen (THE CONVERSATION,2017) “I do
think we’re much safer, and I hope that it will not be in our lifetimes, and I
don’t think it will be.”  Yellen
believes that the rules and polices constructed by Federal Reserve has made the
world much safe from any future financial crisis. She also said (THE CONVERSATION, 2017), “We’re now about a decade after the crisis
and memories do tend to fade, so I hope that won’t be the case, and I hope
those of us who went through it will remind the public that it’s very important
to have a safer, sounder financial system and that this is central to
sustainable growth.” Although the regulation of federal reserve assumes the
safety from the financial crisis in the near future however, we cannot be sure
that it won’t happen in the long-term.  

 

The effect of Great
Financial Crisis of 2007-08 was worldwide. Most of the developed, developing
countries suffered the impact for many years. The developing countries suffered
rapid reduction in their export, in 2009 the world trade volume reduced from
9.3% to 4.1%. Moreover, the crisis caused negative impact in the investment of
the new upcoming markets. Most of the developing countries had to pay a higher
rate of interest to gain the capital. As stated above the demand of the goods
and commodities decreased rapidly along caused the decrease in the export
earnings. The labour market in most of countries crumbled as their were less
demand causing high rate unemployment. Remittances are another field affected
by financial crisis since remittances income in most of the developing
countries. Due to the financial crisis the remittances in developing countries
reduced in rapid rate. The decrease in the all over income of the country also
resulted in the fall of the Gross Domestic Product (GDP) (LIN. J, 2008).  Nepal being a
developing country suffered from the Great Financial Crisis 2007-08. Nepal
national income is mostly driven from the external force than the internal
force. In Nepal the global financial crisis had a direct impact. The major
impact was on the remittances gained from the U.S. and other countries affected
by the financial crisis. Due to the decrease in the remittances consumer
invested less in market causing slow flow of the finance. The crisis caused
rise in the price of commodities and shrink in the employment rate and the
manufacturing, infrastructure market faced the rapid downfall. (Baral. A, 2008). Mexico is another country
that was mostly affected by the Financial Crisis, Mexico being the neighbour
country of the U.S. the crisis caused the major impact in the household prices
and credit market. Though the effect was not so serious, Australia also
suffered some from the Great Financial Crisis 2007-08. The credit market and
housing market and share market also took some blow as the price and rates
started decreasing in a fast rate. The Australian dollar rate also declined by
30 percent (Australian Bureau of
Statistics, 2010).

 

Financial crisis is not a
one-day crisis that happens instantly. It is build up from collection of
different financial problem of national and international causing massive
breakdown in financial state all around the world and leaves an aftereffect for
many years however, financial crisis can be prevented and minimized though
following different process. Financial crisis is major worldwide problem
however, it can be prevented. (Peavler.
R, 2016) After the Great Financial Crisis to prevent the similar crisis the
Federal Reserve made some regulation about the bank and financial institutions
to reduce the risk of financial crisis. High level of regulation should be
followed in a strict pattern to prevent any future crisis. The Great Depression
of 1929-39 was believed to caused not implementing financial ethics. The
financial ethics suggest that the bank should not allow the risky credit
without full inspection. Large firm should not focus on the short term profit
the large firm should have some social responsibility. Financial crisis is not
an individual crisis it is build up process and the best way to prevent a
global financial crisis is to find the problem that may cause the financial
crisis and try to solve. The upcoming new markets should be analysed and
searched for the potential chances for future crisis before entering the
market. The banks providing large mortgages to the consumer without the
requirement to obtain the mortgage is also the cause of the financial crisis,
to prevent the crisis bank had to create strict rule of providing financial
securities to obtain mortgage also known as bank securitization. The government
and the banks should be able to estimate the sustainable debt level and
repayment time to control the credit bubble and prevent any chances of future
bank runs.

 

 

 

 

 

 

 

 

 

 

 

ENCYCLOPEADIA BRITANNICA,
(2018). 5 of the World’s
Most-Devastating Financial Crises. online Available at https://www.britannica.com/list/5-of-the-worlds-most-devastating-financial-crises  accessed on JAN 22nd ,2018.

Claessens, S and Kose, M.
Ayhan, Financial Crises: Explanations,
Types and Implications (February 2013). CAMA Working Paper 06/2013.
Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2295201
accessed on JAN 22nd, 2018

CAPITAL INSTITUTE,
(2011). The Six Root Causes of the
Financial Crisis. online available at http://capitalinstitute.org/blog/six-root-causes-financial-crisis/  accessed on JAN 22nd ,2018

POSITIVEMONEY, (2017). Financial Crisis & Recession. online
available at http://positivemoney.org/issues/recessions-crisis/#1507142518426-c73618ad-c567  Accessed on JAN 22nd ,2018

Amadeo. K, (2018). The
2008 Financial Crisis. THE BALANCE online
available at https://www.thebalance.com/2008-financial-crisis-3305679  accessed on JAN 22nd, 2018

THE CONVERSATION, (2017).
Vital Signs: how likely is another
financial crisis? It comes down to what we believe. online available at https://theconversation.com/vital-signs-how-likely-is-another-financial-crisis-it-comes-down-to-what-we-believe-80186  accessed on JAN 23rd ,2018

Lin. J, (2008). Impact of
the financial crisis on developing countries. The Sunday Times. online available at http://www.sundaytimes.lk/081116/FinancialTimes/ft325.html  accessed on JAN 23rd, 2018

Barak, A (2008). Nepal
and global financial crisis. The
Himalayans Times. online available at https://thehimalayantimes.com/opinion/nepal-and-global-financial-crisis/  accessed on JAN 23rd ,2018

Australian Bureau of
Statistics, (2010). THE GLOBAL FINANCIAL
CRISIS AND ITS IMPACT ON AUSTRALIA. online available at http://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/1301.0Chapter27092009%E2%80%9310
accessed on JAN 23rd ,2018

Peavler. R, (2016). How
do we Prevent Another Financial Crisis? The
Balance. online available at https://www.thebalance.com/how-do-we-prevent-another-financial-crisis-393151
accessed on JAN 23rd, 2018

 

x

Hi!
I'm Erica!

Would you like to get a custom essay? How about receiving a customized one?

Check it out