Financial institutions play a pivotal role in shaping the economy of every nation. Nevertheless, their decisions may dip an economy into economic difficulties or turmoil. The activities of financial institutions may also contribute towards improving the performance of an economy. Over the past decade, financial institutions have played a significant role in determining the wellbeing of an economy. One of the major crises that have significantly affected many economies of the world severely was that of 2008. The average level of the global GDP fell significantly.
Various organizations played a pivotal role in this global crisis. Due to the significant role the larger banks play in the market, everyone in the economy suffers whenever they show crisis (Shah Par 50). This crisis began with housing-related asset markets that triggered the devastating crisis of the year 2008 (Council of Economic Advisers 101). Soon after September 2008, the interbank interest rates increased drastically, the exchange rates shifted and the flow of capital across countries came to almost a standstill. The trade was also adversely affected. This led to a swift spread of the crisis to various countries, which led to distress in countries that had initially not faced such financial shocks. Since many economies in the contemporary world have become intensively interconnected, the crisis spread very fast across different countries.
The investment bank is another financial institution that played a significant role in the 2008 crisis. This bank plays a noteworthy role in the capital markets, both equity and bonds market. It also plays a significant role in advising firms on whether to finance themselves with debt or equity.
Recovery
Following the crisis, many financial institutions acted swiftly in order to solve the problem. The policy responses played a significant role in coming up with the upmost effective strategies. One of the strategies that played a pivotal role, in this case, is the monetary policy.
As opposed to other cases where different economies have been applying the concept of beggar-thy-neighbor, this particular crisis was characterized by the coordination of the policies. In order to achieve these goals, many economies used financial institutions to coordinate and communicate their respective measures so as to be in a position to act accordingly (Lane and Ferretti 7).
During this crisis, many financial institutions collapsed. This included the financial institutions in the wealthiest nations. This is one of the factors that forced many governments to act swiftly to come up with the necessary measures to solve the problem.
The International Monetary Fund (IMF) was one of the main institutions that played a major role in solving the global crisis of 1998. Over the past years, the role of IMF has significantly changed where the institution is currently playing a significant role in crises. Although the IMF has no any significant role in regulating countries’ behavior in normal conditions, the institution plays a significant role in funding various crisis.
One of the major moves that were taken by the IMF was setting up emergency lines of credit in Mexico, Poland, and Colombia (Council of Economic Advisers 102). This amounted to $ 80 billion. The aim of such action was to increase the liquidity in case the investors wanted to get loans for investment purposes. This funding was also intended to signal to the market that funds were available in an effort to maintaining the key players in the market. Through this arrangement, many markets responded positively. The cost of investing in bonds in the countries that got the emergency credit also narrowed significantly.
Another main measure that IMF provided to solve the crisis was providing standby agreements. These arrangements involved 15 countries. In this case, the 165 countries received a total of $ 75 billion that was intended to help them fight the crisis (Council of Economic Advisers 103). This funding was very important to these countries because it helped them to mitigate their liquidity pressure, which was triggered by the crisis. This program played a major role in preventing the large exchange rate swings among these countries.
Another move that was implemented by financial institutions to solve the crisis was a reduction of the interest rates by the central banks. This action was intended to encourage borrowing in order to boost economic activities. During the crisis, trade came to a standstill and so was the rate of economic growth. Therefore, in order to revive the economy, the central bank reduced their interest rates in an effort to trigger the level of borrowing. When the interest rates are low, more people will have an incentive to borrow because they will be more certain about making profits. When people borrow for investment purposes, their income will later increase. This will consequently lead to an increase in the level of disposable income. As the level of disposable income increases, people will increase their spending hence increasing the aggregate spending power. This stimulates economic activities hence stabilizing the economy.
Commercial bank institutions’ also have a significant role to play as far as the global crisis is concerned. Traditionally, the commercial banks served the business as well as the commerce (Lane and Ferretti 6). They played a pivotal role in meeting the needs of the seekers of small loans, small savers, and buyers; such services can significantly contribute in generating consumption in an economy. This will further contribute in generating economic activities within an economy hence suppressing the effects of the crisis.
The G-20 played a significant role in solving the crisis. It made a significant role in coordinating financial and trade policies in response to the crisis. The G-20 is composed of 19 nations and the European Union. This was composed by some of the most powerful economies in the world. Therefore, this organization made a significant contribution. The members were required to stabilize their financial sectors taking into consideration the then crisis. Leaders in this organization also debated on the major financial reforms that were necessary in order to prevent such an occurrence.
One of the main steps taken by the G-19 was to provide funding for the IMF. G-20 leaders decided to fund multilateral banks with over $800 (Council of Economic Advisers 103). Multilateral financial institutions have a significant role in the current crisis and therefore funding them was a major step in solving the crisis, both in the present and in the future.
Another measure that was taken to solve the problem by the organization was the reforming of international banking and finance. In this case, it was proposed that the liquidity requirements and capital in these institutions be increased in order to prevent such crisis.
In order to increase the ability of the financial institutions to provide loans for the investors, it was decided that the reserves that the banks keep be changed. Through fractional banking, banks are required to have only small reserves against which a loan is given. These arrangements play a significant role in good times. In some cases, it may lead to a crisis.
It has also been argued that the financial structures could be refined by providing incentives, promotion transparency, and eliminating unnecessary competition. Over the past years, the large institutions have been resistant to change, a fact that has led to unhealthy competition. It was proposed that restructuring such arrangements will help in overcoming the crisis in the future.
Conclusion
In conclusion, this discussion has revealed that the period between September 2008 and the end of 2009 presents one of the major challenges in the economy that will ever remain in world history. The crisis led to a devastating fall in the global average level of GDP. The trade was also affected significantly. This led to a significant fall in the level of trade. This crisis led to severe conditions in different countries across the world.
During the crisis, the IMF played a significant role in solving the problem. This crisis has revealed the significance of international coordination in finding the solution to the global crisis. Through international coordination, various nations managed to come up with appropriate measures that led to changes in the financial structures. These measures provided effective remedies that were necessary to mitigate the crisis both in the present and in the future. This has helped in solving the problem of unemployment among other problems at the national level.
References
Council of Economic Advisers (U.S.). Economic Report of the President, Transmitted to the Congress February 2010 Together With the Annual Report of the Council of Economic Advisors. U.S.A.: Government Printing Office, 2010.Print
Lane, Philip, and Ferretti Gian. The Cross-Country Incidence of the Global Crisis. International Monetary Fund; WP/10/171, 2010. Print
Shah, Anup. “Global Financial Crisis.” Global issues, 2010. Web.