A financial crisis is a situation in which the supply of money is outpaced by the demand for money, it is in other words, when banks or investments drop quickly in value, usually in a matter of days or weeks, it would begin to develop into a financial crisis. This was the kind of situation experienced in the global financial crises[GFC] that refers to the period of extreme stress in global financial markets and its banking systems between mid-2007 and 2009.
During the global financial crises, a decline in the US housing market was a catalyst for a large-scale financial crisis that crept beyond the shores of the united states into the rest of the world through the interconnecting nature of the global financial system. Many banks and business firms in the world incurred large losses through borrowing and lending, relying on the government to help them prevent bankruptcy. This was claimed to be the highest and the deepest recession since the Great Depression in the 1930s.
In the immediate past years before the Global Financial Crisis, the United States and many other European countries experienced a favourable economic condition, economic growth was strong and constant, and rates of inflation, unemployment and interests were relatively low. It was amid this beautiful economic condition that the prices for house marketing skyrocketed. Expectations of people that house prices would consistently grow misled many individuals, especially in the ‘United States’ to borrow without qualms from banks that were willing to provide mortgage loans. The same type of mentality was extended to property developers and individuals in European countries e.g Iceland, Ireland, Spain and other countries in eastern Europe and they were forced to borrow excessively due to the mouth-watering expectations. Banks and other investors in the USA and abroad borrowed increasing amounts to expand their lending and purchased MBS products. Borrowing money to purchase an asset that was seen as an increase in leverage magnifies potential profits and also potential losses. As a result, when house prices began to fall, banks and investors incurred large losses because the borrowings were too much.
Furthermore, banks and some investors increasingly borrowed money for very short periods, including overnight, to purchase assets that could not be sold quickly and consequently, they became increasingly reliant on lenders, which included other banks extending new loans as existing short-term loans were repaid.
However, the irony of the whole show was that many of the mortgage loans provided to individuals especially in the United States were for amounts that were close to what the individuals were not able to pay. Many lenders providing mortgage loans did not have a close watch on the borrowers’ abilities to make a payback. This goes a long way in portraying the widespread conception that the conducive conditions would continue to spring for a very long time. Not only were many individuals provided with loans so large that they were unlikely to be able to repay them, but fraud was increasingly common such as overstating a borrower’s income and over-promising investors on the safety of the MBS products they were being sold.
More importantly on the other hand, as the crisis unfolded, many central banks and governments did not fully recognise the extent to which bad loans had been extended during the boom and the many ways in which mortgage losses were spreading through the financial system.
Moreover, lenders had little incentive to take care of their lending decisions because they did not foresee the coming losses that would still emanate. Instead, they sold large amounts of loans to investors, usually in the form of loan packages called ‘Mortgage Banked Securities’(MBS), which included thousands of individual mortgage loans of varying qualities and quantities. The MBS products became increasingly complex and opaque with time but continued to be projected and rated as safe by external agencies.
The financial crises were claimed to have reached its echelon following the failure of the US financial firm Lehman Brothers in September 2008, the bank held 30 times more in real estate than it had capital and had been borrowing too much money to fund its mortgage investments, however, the market turned and Lehman had held on to-or could not sell-so many low-rated mortgages, investor’s confidence in the firm declined and led to its crash in September 2008. Together with the failure or near failure of a range of other financial firms around that time, this triggered a panic in financial markets globally. Investors began pulling their money out of banks and investments funds around the world as they did not know who might be the next to fail and how exposed each institution was to subprime and other distressed loans. As a result, financial markets became dysfunctional as everyone tried to sell at the same time and many institutions wanting new financial supports could not obtain it. Businesses also became much less willing to invest and individuals no willing to spend due to their lack of confidence.
Many governments increased their spending to stimulate demand and support employees throughout the economy; guaranteed deposits and bank bonds to shore up confidence in financial firms; and purchased ownership stakes in some banks and other financial institutions to prevent bankruptcies that could have exacerbated the panic in financial markets. Although the global economy experienced its sharpest slowdown since the Great Depression, the policy response prevented a global depression. Nevertheless, millions of people lost their jobs, their homes, and a large amount of their wealth. Many economies also recovered much more slowly from the GFC than the previous recessions that were not associated with financial crises. For example, the US unemployment rate only returned to pre-crisis levels in 2016, about nine years after the start of the financial crises.
In response to the crises, regulators strengthened their oversight of banks and other financial institutions. Among many new global regulations, banks must now assess more closely the risk of the mortgage and other types of loans they are providing and use more resilient funding sources. For example, banks must now operate with lower leverage and can not use as many short-term loans to fund the loans that they make to their customers. Regulators are also more vigilant about how risks can spread throughout the financial system, and require actions to prevent the spreading and increasing risks.
The financial crises did as well leave its filthy hands on the global world and its inter-woven relations. After unravelling the nature of the foundations of US power in international finance, upon this vital analytical and historical basis, it is very important to look into the decline of US hegemonic power within the international financial system and critically evaluating the strength of these claims in the face of the few debates opposed to a decline and the relation this all holds to the crucial significance of the financial crises. Under neo liberalism, finance has become very prime to the sustenance of American’s capitalism and this fact throws into focus the core demand of the capitalist system, namely, the relentless push to secure efficient processes of capital accumulation-a drive that is compartmentally crucial to the existence of such a large financial sector and the relationship this holds contemporary primacy the global financial system or structure.
It’s Impacts On International Relations
My own analysis would be based on the impacts it had on developing countries, Africa and Africa’s development, sustainability and it fights towards eradicating abruptly poverty.
The global financial crisis has also portrayed the importance of the world coming together and forming a unified block against poverty and subsequent financial crises. Policymakers in every country should look beyond their domestic issues, and have their eyes on international cooperation and institutions. The financial crisis made leaders realize that they had to work together globally to defend their interests.
While the financial crisis originated in developed countries, developing countries were not immune to its effects. Reduced foreign investment, trade and remittances had a significant impact on the economies of the world’s poorest countries. The crisis manifested itself in growing budget and trade deficits, currency devaluations, higher rates of inflation, increasing public debt and dwindling currency reserves. Developing countries were hit hard by the financial crises, although the impact was in a way delayed. Every country had different challenges to face. The crisis was transmitted primarily by trade and financial flows forcing millions back into poverty. Attainment of the Millennium Developing Goals is seriously jeopardised in many countries. Many developing countries did not and do not have the resources to stimulate the economy and protect their socially disadvantaged population to the same extent as the industrialised countries. However, many countries have made considerable efforts to mitigate the effects. Developing countries have also increased their cooperation with one another and are urgently demanding a greater voice in global economic affairs. The industrialised countries are for the most part more concerned with their own problems. Their readiness to prove many extensive aids are limited. They are under pressure from international institutions to relax their previous dominance in favour of the increasingly strong emerging countries. A shift in power and influence that was already noticeable before the financial crisis is deepening.
Ever growing poverty, unemployment, huge inequality between the rich and poor countries are witnessed to the nightmare and failure of the world economy first time in the 21st century. The present economic crisis across the globe are said to be the result of neo-economic theories like Thatcher-Regan free-market model which dominated world economic philosophy for more than 30 years. The series of the current global financial crises, particularly in the USA and European countries service industry, automobiles industry and Information Technology and its related services are becoming global threats that swallow the economies of developing countries. Many studies said that this is the result of the failure of the free-market model where government intervention in trade and commerce is negligible. This should bring to the limelight the impacts of the global financial crisis on developing countries like Asia, Africa and India who are forced to become puppets in the hands of developed countries.
The global financial crisis is also impacting on the African economies in a variety of ways. The most significant is the decline in export prices and volumes. Largely as a result of falling prices and demand for their commodities, many countries have witnessed sharp drops in primary commodity exports. As of June of 2008, non-energy commodity prices plunged 38 per cent. Oil prices fell 69 per cent between July and December 2008. The expected decline in exports is huge:42 per cent in 2009 and 43 per cent in 2010. African countries suffered declines in remittances that contributed to foreign exchange shortages and increased poverty as some of the most vulnerable and poorest countries lost a good amount of money and sources of income.
The financial crisis will reverse the recent achievements by African countries in raising growth rates and having sustainable development. According to the African Development Bank(AFDB), real GDP growth is expected to slow to 4.6 per cent in 2009 from 6.2 per cent in 2007. Southern African will hit the hardest with its forecast growth rate slowing to 4.0 per cent in 2009. Oil exporting countries will also be badly affected. Fiscal balances are also expected to deteriorate significantly as tax revenues, especially those that are tied to commodity sales, decline sharply. Fiscal balance in Sub-Saharan Africa will deteriorate by as much as 6 percentage points of GDP to a deficit of about 4 per cent of GDP in 2009. Rising demand for social spending is compounding the stress on government budgets. With fewer resources, countries will be unable to reach and maintain their development goals of reducing poverty and investing in infrastructure. Although some African countries were making significant progress towards achieving their Millennium Development Goals before the crisis, the shortage of export revenues, foreign finance, and slower growth will certainly hamper these advances.
Again, the global financial crisis also affected the international trade, there was a relative decline in foreign exchange and trade, which was orchestrated by the fear of landing into a business which was potentially a failure, many individuals and investors were discouraged by the failures recorded in the immediate past years. It was also boosted by the popular decline of the Lehman Brothers which used to be in their superlative form before the inception of the global financial crises. Africa was at the most disadvantaged end of the whole show because their raw materials were not wholly welcomed by foreign investors, who banked in them for their industries.
The global financial crisis is a big history and work should be put in place to avoid further re-occurrence.
Johnbosco is a Nigerian writer.