Introduction
The phrase financial crisis has been applied in wider aspects in recent days with an array of state of affairs in where some financial organisation or assets unexpectedly go down of a large portion of their value. Through around the centuries the civilization has evidenced financial crises coupled with banking panics as well as numerous recessions and the lingering recession would turn into economic depression. An economic downturn durable for several financial quarters or else more is typically denoted as a recession. Post Keynesian economist Minsky, Hyman has presented his theory of financial crisis under an institutional setting of global financial system (Wolfson, Martin H., 6).
Minsky’s theory of financial crisis argued that comprehensive exclusion of capital controls, noteworthy boost of financial deregulation in domestic markets and the multinational vendors particularly IMF1 enabled to get involved with durable crises.
At the beginning of the recession in 2007, USA has passed an inflexible economic phase that already has an impact on global economy. This paper requires impact on world economy at post recessionary period by means of a comparison among financial crisis of USA among major countries in the world. Changes in financial markets with the change of financial variables, interest rates, price of financial assets are covered here briefly. In case of major countries here, emphasize on stock market prices and interest rates of Australia, China, Japan and Canada at the beginning of financial crisis of USA in 2007. As the requirement of the paper, here assemble a literature overview and empirical perspective along with relevant graphs.
Literature review
Operate financial activities the country and an organisation need to involve in a number of terms those closely involve in financing. Financial variables, financial assets, interest rates, financial markets, financial institutions are the factors that foster financial movements. A short description of these aspects is presented in bellow-
- Financial variables: Financial variables are the facts that involves in- boom or recession price categories. Risk, return, interest rates, financial assets, financial markets are under financial variables. Each component is interrelated in financial activities.
- Financial assets: Financial assets are also termed as security. Financial assets include- shares, debentures and bonds in terms of financial papers. With the aim of gathering necessary funds, these assets are issued, bought, sold and traded. Leasing is another way of owed these assets. Shareholders are the heart and soul of an organisation and except of them investment in different project could not possible.
- Interest rates: In short, interest is a cost and relation between corporate profit and interest rate is proportional. Lower interest rate brought profit and higher interest rate reduce profit growth. In share market, higher interest rate boosts the stock prices. Another important fact is that increase of interest rates declines reserves. So, all of economic tasks of a country interdependent on interest rate and holds a competitive atmosphere between share and bond market.
- Financial markets: Within last few decades, financial markets enlarge its boundaries and go into the global market. Several tasks are required in managing financial markets- forecasting and planning, decide investing and financing standard, coordinate and control and finally transaction among financial markets. Financial markets are categorized into two forms- developed stock markets and emerging stock markets. United States, Japan, United Kingdom, France, Germany and all developed markets included 31 countries are under develop stock markets. On the other side, China, Korea, Argentina, Brazil and another 78 countries are considered as emerging stock markets.
An overview of financial crisis of USA after 2007
The term “recession” refers downturn. Recent downturn of US termed two view points- by the economist and by the NBER2. The NBER denoted the current depression as “recession” and on the other hand, economists evaluated this by the fluctuation of monthly GDP (Gross Domestic Product).
At the beginning of recessionary period in 2007, USA faced a tough financial crisis that has an enormous consequence on all economic phase. Other than this, USA had faced recession four times within past thirty years. NBER published a report that recession continues a circle and took place after every eight years and its average lifetime is approximately nine months. At the end of 2007, USA stayed at 50: 50 propositions toward the inside of recession. Within last 12 years, share price valued cheapest regarding as the valuation changed in recession. In the light of economists, potential events go into recession are- interest rates, fluctuation of oil prices, instability of major currencies, changeability of commodities etc.
Speed of the recession either sentimental or go-slow depends on major financial activities and managerial decisions like- employment ratio, investment criteria and impact on funding and spending. Experienced of recent recession the Federal Reserve reduces interest rates and now it is lowest compare to last eight years. Not only in interest rates, recession also devalued US dollar and for this, they need to enlarge exports. In this recessionary period, most of the economic areas are go down from their level but non-housing sector holds a flexible point still now. In September 2008, economic growth was 1.2 % where as their expectation was 1.5% and typical economic growth was 2.2 %. This recession affects on US housing sector most as other areas. For instance, contribution in GDP by housing was 6.2% before recession but now it is hardly (4.4 – 4.9) percent.
In 2008, fund rate of US Federal Reserve was fall 2% from 4.25% though US economy needs not to depend on consumers in essence. December 2008, employment was increased only by 18,000, which were smallest in the last decade. Consequence of this health circumstances would be questioned next.
In the downturn, involvement in world economy is only 5 percent where as last six years, US contribution in world economy was 10%. In case of export – import US biggest trading partner is Europe and this partnership covered about 22%. With the stepping up of China and the impact of depression most export – import areas are covered by China and partnership ratio of US vs. Europe has decreased. At present, China covered almost 23% of US foreign trade activities and in Canada; this percentage is about 18%.
Effects around the world
- Changes in financial asset prices,
- Changes in Interest rates,
- Changes in financial variables,
Impact of financial crisis on Asia
The threat of the impact of financial crisis on Asia has been spread out among all countries in this continent. Most of the countries insist on the US government to make available a momentous pledge as well as bailout correspondence for the US economy due to it has an incidental effect of encouraging overseas entrepreneurs and assist effortlessness concerns for Asian economy.
India, China and Japan, are seriously affected by US recession, for example, by March 2009, India’s economic growth will have slowed quickly to 7.1%, China’s growth is expected to slow down to 8%, though Japan has suffered its own crisis from the 1990s but for current crisis its industrial production fell by 10% and car import has reduced 45%.
Some of the analysts of Asia argue that Asia has been significantly isolated from the western financial system and thus the sub-prime mortgage crisis would not suppress the Asian Economy. A number of Asian countries have evidenced speedy development as well as assets creation in most up to date years. But this prediction would be wrong as the western countries have a great deal of investment in Asia. The most Alarming threat is that the Asian country foreign currency reserve has been kept in largely is US dollar. For the political economy of US on the Asian countries at once, do not allow them to covert their foreign currency reserve in gold or euro zone. Thus, they have no rescue package to keep apart themselves from the US credit crush. Some of the Asian leaders have already been addressed for effectual and wide-ranging restructuring of the IMF’s financial policy for this region.
Recessionary effect on Gulf Countries
The Gulf Countries like UAE, Kuwait, and Saudi Arabia have also affected by the US financial crisis because the oil price has dropped up to 50%. The Kuwait Times (2008) reported that the NBK3 has determined that the country is going through an inflationary stress. The annual report of Central Bank of Kuwait has mentioned that the CPI4 of the country Kuwait has jumped at 10.1% and the domestic interest rate has been cut at least 50 basis points reported on January 23, 2008 and this interest rate shaped 5.75% instate of 6.25% of previous year. In the fiscal year 2007-08 the interest rate for consumers deposit for KD and USD declined 4.507% and 4.646% correspondingly next to 5.013% and 5.209% in 2006-07 and these data may help to understand the whole situation.
Most of the oil producing countries is Non-tax countries where the individuals are not taxed. In these Gulf countries, oil sector has contributed 50% of its GDP share, therefore, the US recession has a greater impact on the macroeconomic factors of these countries for close cooperation and US dollar pegging. However, Saudi Arabia and UAE has already started to contribute US recession by investing in defect fallen banks.
Recessionary Impact on Interest rates & Unemployment
The inflation has been turning faster into dilemma of the looming recession and derived into the way to a pointed turn down in demand as well as economic motion worldwide. The recent global financial crisis is the main cause for unemployment in all over the world, especially industries, banks of UK, USA, UAE, some Asian Countries like China, Japan, India, and few gulf countries like Kuwait. Growing joblessness has turned increased redundancy at the highest of this decade. CNN News (2008) has quoted Alistair Darling the finance minister of UK and added that the country has been passing through the most terrible economic crisis among the past 60 years, which would be deeper and long lasting. In China 20 million, in India 6 million and in UK 8 million employees lost their job. Though to protect this situation US President Barack Obama has passed rescue package and Bush had passed bailout bill but both are unexpectedly failed to solve the problem.
Recessionary impact on Global Stock Market
Treanor, J. (2008) reported that the credit crunch sink its teeth into the stock markets and the stock market already been crouching down. The small retailers have been disparaging and blamed for thrashing the share prices downstairs. The market falling is not a new thing for stock market. Nevertheless, it is flattering more and more contentious in the market downturn. The stock-market customers are buying shares with general prediction that the market would gain its normal values, but the market is going away downwards.
Treanor, J. (2008) also reported that the course of action is very straightforward just a broker borrows some shares from a large metropolis investor those who takes charges for their services. The broker then goes to the market and sells out the shares. Later while the price falls, the broker buy back them more and more and then he is recurring the shares to the equitable vendor. The variation of the two prices would generate his profit.
For instance in March 2008 the share price of HBOS Banking group plunged a disgusting 17% in a same day’s trade, which has evidenced a dangerous scenario in the history of share market. The retailers have been liable to driving this downwards. The specialists argued that the retailing is not in opposition to the existing rules but the trading influenced by rumors has seriously driven the market downwards. The regulatory authorities like FSA and SEC have steeped to stabilize the market by hunting the notorious traders who were taking the opportunity of false rumors. They scanned the e-mail exchanges and trapped mobile phone records but failed to identify anybody to blame.
Moreover, another reason of market downwards was identified as some of the companies were in huge shortage of emergency cash requirement and carried out an urgent cash call from the market, which affected the market to go downward. At the end of all this investigation, it was founds that the investment banking corporation JP Morgan Stanley was one of the retailer of 2.4% of the HBOS and amounted more or less £350 million. Still the market is unstable and going down wards.
James C., (2008) made comparison of stock market prices and interest rates in the major countries like Australia and China after financial crisis of USA: Compare to recession in 2001, Australia holds a stable place now where as economists forecasts that recession affected the US economy about (40 – 50)% and there was a strapping chance reach it at 100 percent.
With the effect of GST introduction, Australia has able to avoid recession in December 2000 when their economy was going slow from 5.2% to 1.5%. Compare to recession of 2000, now US share prices are cheapest where as it was overvalued in 2000. In case of interest rates, it was 6.5% in 2000 and now it is 5.25%.
In US economy, recent recession grasp mostly sub-prime components and the housing areas. In short, recession affects a versatile effect on US economy as well as in the world. Modes of financial activities and managerial decision determine the velocity of the current recession.
People cut down their budget of food and gasoline and banks bring down the lending amount. On the topic of recession, fear builds a self-fulfillment impression in people’s mind as well as organisation. On the other hand, present Australian balance sheet is strong than before and their trading commotion mostly depend on China. Trade between Australia and China is now 15% where as it were 7% in 2001 and trade between Australia and US decreased by 4% within last 7 years.
There has an indirect impact of US recession on Australia- they requisite less supply from Australia than before and this enable them spend little. These trading activities between Australia and US greatly affected China and Japanese business. However, now China involved in 16% of US trading operations. Compare to trade in Canada of China and Mexico are respectively- 12 and 11% in total of 18%.
With the speeding up of China and lessening of share prices involvement in global economy of US has decreased by about 20%. Another impact of recession is that- it reduced the US’s involvement ratio in global GDP at a lowest form compare to last 60 years. On the other hand, this ratio enlarges at (5 – 15) percentage with in last 40 years of China especially in last 7 years.
In terms of world economic growth, over last six years US participates 10 percent in terms of 0.5-point percentage. Recent recession down this and other side China is capable to enlarge this percentage into 35 in terms of 1.7 points. This is the consequence of slow down US economy from 2.5% to 1.5% during 2008 represents a versatile impact of recession on global economy.
After conquered the last recession in 2001, at this instant Australia’s corporate profit is sixteen times higher, unemployment ratio is only 4.5% in terms of 2 points and government’s bank loan is lowest than last decade. When Federal Reserve reduced interest rates with the aim of back the image in housing industry and economic growth but in Australia recent interest rate is highest than in last 11 years.
US recession generates an enormous fear in investors’ mind and in October 2008, share prices fall 9.4 percent and it was the biggest fall of Dow Jones within last five months. Price earning ratio of US share-market dramatically has gone down by 4.85% and now it placed at 15.95% where as it was 20.8 percent over last 13 years. In Australia, share markets hold 15.7 as their long-term average and their price-earning ratio is 14 percent. However, they attain a historical record in November 2008 but it decreased and now ASX 200 is 7.6%.
Conclusion
After the great depression in 1930s, recent recession is threat for around the world. Share price of major countries are affected through this recession. Compare to last recession in 2001 this depression decline the share prices. Boosts of technological development were the prime fact of last recession. In that time, Australia suffered much compare to other major countries. However, in instant most sufferer country because of the recession is United States (US).
Explain the post financial crisis in 2007 of USA, this paper take account of a theoretical overview along with an empirical perspective. An overview of financial crisis, its affect around the world, stock market scenario, recessionary impact comparison among USA and other major countries like Australia, China, Japan and Canada, India has described here briefly. Rumor is another fact that plays behind in declining share prices. Hopefully, USA and other major countries that affected by this recession would overcome successfully very soon.
Bibliography:
James Craig, US Recession in 2008?, Economics. Web.
Gander P. James, Extreme Value Theory and the Financial Crisis of 2008, Economics Department, University of Utah. Web.
Kilmister Andy, The Economic Crisis and its Effects, IV Online magazine. Web.
Panday, I. M, Financial management, 9th Ed, 2007, Vikas Publishing House Pvt. Ltd. India, New Delhi. Web.
Treanor, Jill (2008), What is a short position? The Guardian. Web.
Scott Besley and Eugene F. Bingham, Essentials of managerial finance, 13th edition, 2007, Thomson South Western, USA, NY. Page-15, 71-75. Web.
Shah Anup, Global Financial Crisis 2008. Web.
Wolfson, Martin H. Minsky’s Theory of Financial Crises in a Global Context, Journal of Economic Issues, Vol. XXXVI No. 2002. Web.
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Footnotes
- International Monetary Fund.
- National Bureau of Economic Research.
- National Bank of Kuwait.
- Consumer Price Index.