The world is encountering what we know as a ‘financial crisis’ currently, with every country facing the worst inflation attacks ever. Even though globalization has made the world a smaller place, the economic deficits each nation is undergoing are leaving natives and residents from hand to mouth.
Inflation means that the purchasing power of buying commodities is lowering with the rise of the prices of goods. It is the rate at which the prices of commodities and services are rising, and people are suffering at large due to this current situation.
The current financial crisis that is being experienced by the United States has affected all the economies of the globe. Never before had the scenario been as bad as this one, which has affected the prices of even the most basic of necessities that people need to purchase. The prices have risen tremendously, and some even have to think twice before buying necessities such as food and clothing, due to lack of affordability.
The current crisis has been seen to be mainly due to the poor lending strategies of banks. This is not the sole reason for this catastrophe, though. The banking crisis and the money which people have taken as loans for their consumption are both affecting the economy. So it is not the banking crisis alone that is to be blamed, but also the consumption practices of people (Saft, J., 2008).
The debts that had been taken by people have been mishandled, and people have been opting to buy real estate with whatever entities they had. For a long period of time, the US residents have been buying things beyond their means, and are now suffering. The loans that are accredited to residents should be managed in a way by which they can be easily paid back, instead of being piled up (Science Daily, 2008). At present, the mortgage crisis concerning the purchasing of real estate is a matter of great interest to the people, but the root cause of all such aftermath arose after the untenable dual deficits of finance and trade, that have left both public and private sectors of the United States at a loss.
Apart from the USA, the UK, and Asian regions, as well as the Middle Eastern countries, are all facing the same loss. The economy of the USA has affected the rest of the world in the negative, causing price shoot ups in trade and commerce, and the local markets. The only way out of this present situation is to rebalance goods, produce more, and save more.
The attainment of loans for the purpose of gaining certain objects of interest has become the norm. This high demand for those objects causes a rise in prices, which again causes an increase in demand. The rising of the prices will at some point in time come to a saturated level, causing problems in finding new buyers or clientele, and the investors wish to sell off whatever they have, to gain profits and to keep their business running. So they drop prices again. All buyers want to refrain from any further losses, and this somehow leads to a fall in the prices. Those buyers who bought the object at the new price have to suffer from loss. These losses go side by side with the changes in demand, and the whole economy is affected. All the people involved in a crisis are fully aware of it, but only the stages which they are going through various. If they are in the initial stages, they can still benefit from profits.
The current problem in the USA took its initial stages in the year 2000, when the federal funds rates were decreased from 6.5 to 1 percent. The rate of inflation remained higher than the interest rates for two to three years, and buying estate property became common in this time period. Since owning a home is a priority to US residents, all and sundry began investing and the mortgages tripled by the year 2005. The real estate prices also raised by 10-20 percent yearly and banks started giving out loans, of which the “subprime” ones were most talked of. These loans are granted to those who are unable to even afford a loan but are allowed to avail themselves, causing high risks of defaults (Heinrich, M., 2008). Whereas banks usually gave only 60-80 percent of the purchasing price, to keep some form of security just in case the client wishes to opt for foreclosure. But without much concern of this aspect, loans were given out, which many people took for granted, and because of which the entire world is suffering.
The role that the banks played in all the processing has been of concern. Those investors who bought their stocks with loans are suffering the greatest. The current status as of April was that banks are at a loss of 270 billion dollars so far. The current state has also taken place due to social wealth, and deregulation in markets. The unequal distribution of wealth in leading capitalist nations is now moving on to add an advantage to high-income persons.
The global loss of 270 billion dollars can be handled by global markets. The statement that the crisis arose due to the payment of bonuses to top management officials is incorrect. The crisis arose due to the high level of mortgages that were granted, and the loss that people faced on buying real estate. The rendering of loans by banks is what caused the current inflation because it is now very difficult to pay back the loans that had been taken earlier.
These days this matter is strictly being looked into, and people have started controlling their consumption levels. The exporting enterprises are suffering, being unable to meet the costs of export, the value of the dollar is becoming weaker. Until today the USA still is the economic power of the world, but the developing countries of Asia can easily compete now. An example of this is the practices put forth by China, in holding massive foreign currency reserves and Indian Tata Motors boughtJaguar. USA’s economic significance is decreasing, because of global competition that is rising alongside, due to such executions.
Financial markets these days are close to the principle of freedom and flexibility. Transactions costs are low and the inclination toward more rapid business is coming up with lowered risks. However, these are the markets that are unstable and prone to downfall. The IMF, or International Monetary Fund, has forecasted ‘dramatic shortcomings’ and has stressed more control and regulation of states. But due to lack of clarification of the types of regulatory measures to be executed, there is the risk of yet another crisis before the new ordeal.
Despite the new regulatory measures, there will remain the chances of capitalism suffering from crisis. This will be due to inefficient production and capitalist circulation. The current crisis has given the risks of further indications for future pitfalls, due to the rise in prices of raw materials which were caused by increased consumption of goods. Speculations are being made, especially for the rise of prices of crude oil and wheat, to be on the rise in the near future too.
The economic crisis of 2008 is owed to the mortgage practices that had adhered to in the USA. The excessive debt and leverage of the financial system on the whole throughout the world is the basis for the existing situation. A reduction in lending may help counter the problem, and deleveraging until a reasonable amount of lower levels of prices can be attained. According to the leaders of the country, the financial crisis can be overcome by foremostly protecting the financial system. But this should have been thought of before when the loans were being given out in a form that should not have taken place.
Causes
In the technology era, everyone wants to achieve high goals in the market and everyone wants to earn money in less time. Nowadays, the world market is facing bad financial crises due to which numerous things are affected and going towards downfall. The United States market is facing numerous challenges these days. In the past few years, banks have become an essential place to invest. Nowadays, the American economy and many other countries’ economy are facing lots of financial crises due to wrong policies and actions took place in past few years. There are some reasons which caused financial crises. According to the central bank, the biggest reason for financial crises is that foreign investors withdrew their investment due to the downfall of the country’s economy. There was a huge expenditure on the war against Afghanistan and Iraq. Many countries invested huge capital in defense and the war against terror. War against terrorism is one of the biggest reasons due to which the world market is facing bad financial crises these days as billions of dollars were spent in these two wars. According to the pieces of evidence, it was the biggest dollar flow since 1999 when America planned to attack Afghanistan and Iraq it was recorded the worst dollar devaluation due to which outflow reached 8.5 billion dollars. Bank structure in the past few years was also mismanaged and now it has become one of the biggest causes of ongoing financial crises. The rise in oil prices is also one reason for financial crises. Dislocation of resources and human resources also causes financial crises to an institution. Financial crises in the world market are caused by banks as there were lots of NINJA loans in the system in the last few years and banks caused 10% less than money to mortgage holders. According to theory to be on the safe side there should be no connection between the share price and account holder deposits. Customer usually stops investing money when they hear that bank is facing crises, and then depositors would queue round the block. Recruiting additional staff in banks has also a bad impact on the nation’s economy. Keeping an eye on current financial crises many commentators have blamed bank’s regulation and policies as the biggest cause of downfall. Banks were reporting inflated profits and paying inflated bonuses to top management in the past few years.
Methods of Getting out of the crisis
To overcome financial crises or any other crises, the nation has to play a significant role. It has been observed that nations who worked themselves can only be able to change their lives. Everyone must play a significant role to overcome all these financial crises, following are some ways by which a nation can play its part to resolve current crises: Take responsibility for your work, Perform your duties well where ever you are, pay full tax every year, follow rules and regulations.
No doubt, only government poses the ability to overcome these crises by implementing proper rules, policies and by strong on-time decision making. By applying high-interest rates, proper collection of tax every year, reducing governmental expenses, by monitoring cash flow in banks and other financial institutions a government could be able to overcome financial crises.
- Government must apply such policies and plan attractive strategies for foreign investors to get investments from them.
- Announce refinancing policies for attracting customers outside the country.
- Try to increase the nation’s capital and investment. Reduce extra expenses of government officials.
- Try to solve problems by negotiation from other countries, avoid wars as they take huge capital and give no output or desired results. Keep track of the country’s financial expenses. Always Design a budget after discussion from other officials to produce an effective budget plan for future development.
- Violation of bank rules also caused a huge vacuum in finance, so government must plan some strategy for bankers to facilitate them and at the same time restrict them for proper allocation of money in different domains.
- Government should design a budget keeping an eye on its income, by reducing official’s pay a government can also deal with current ongoing crises.
- Government should plan some strategy for property holders for some time to reduce such expenses and financial crises. The misallocated resources are also the biggest reason for ongoing financial crises so government should keep an eye on this factor (Joseph, 2008).
There is a need of restoring customer’s trust and confidence in banks by designing policies for new customers and charge low-interest rates. Most businessmen borrow money from banks to pay off their dues so there should be some effective strategy for interest rates on such loans and debts. One important thing that must be realized is that if there would be no borrowing, no business can operate so ultimately businessmen need to get loans from banks. to overcome such financial crises, the government and banks must design some effective policies on interest rates for local customers as well as foreign customers keeping an eye on changing business and market needs. There is a lack of confidence by investors, a big cause of financial crises so there is a strong need to retain their confidence. Banks must design some credit rating policies to play a businessmen significant role in the world market financial crises (money morning, 2008).
References
- Heinrich, M. Monthly Review 2008. Web.
- Saft, J. The Current Financial Crisis is only the Beginning: Herald Tribune 2008.
- Science Daily, 2008. Web.
- Joseph stiglitz, 2008, How to get out the financial crises.
- Money_Morning, 2008, the real reason for the global financial crises. Web.