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Global Crisis Essay

1290 words - 6 pages

Global Financial Crisis

The world financial system is now undergoing a global economic crisis that started to show its effects in the middle of 2007 and to the present. Around the world stock markets have fallen, large financial institutions have collapsed and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems (Godley, 2009). Although recent data indicate the large industrialized economies may have reached bottom and are beginning to recover, for the most part, unemployment is still rising. Numerous small banks and households still face issues in restoring their balance sheets, and unemployment has combined with ...view middle of the document...

These financial institutions are no longer lending capital to each other.
The extent of the problems has been so severe that some of the world’s largest financial institutions have collapsed. Others have been bought out by their competition at low prices and in other cases, the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions (Britch, 2009). The total amounts that governments have spent on bailouts are dramatically large. According to Bloomberg (2009) from world credit loss of 2.8 trillion dollars in October 2009, US taxpayers alone spent some 9.7 trillion dollars on bailout packages. 14.5 trillion dollars or 33 percent of the value of the world’s companies has been wiped out by this crisis. The United Kingdom and other European countries have also spent some 2 trillion dollars on rescues and bailout packages. More is expected. In the meanwhile, smaller businesses and poorer people rarely have such options for bail out and rescue when they find themselves in crisis. Because of the critical role banks play in the current market system, when the larger banks show signs of crisis, it is not just the wealthy that suffer, but potentially everyone. “With a globalized system, a credit crunch can ripple through the entire economy very quickly turning a global financial crisis into a global economic crisis” (Bloomberg, 2009). For example, an entire banking system that lacks confidence in lending as it faces massive losses will try to shore up reserves and may reduce access to credit, or make it more difficult and expensive to obtain. “In the wider economy, this “credit crunch” and higher costs of borrowing will affect many sectors, leading to job cuts. People may find their mortgages harder to pay, or remortgaging could become expensive” (Britch, 2010, p.58). For any recent home buyers, the values of their homes are likely to fall in value leaving them in negative equity. As people cut back on consumption to try and weather this economic storm, more businesses will struggle to survive leading to further job losses. There are multiple measures that government can use in order to shape economy. “The history of successful national economies tells that markets need to be regulated by political institutions in order to work effectively. Government regulation is necessary to enforce contracts, assure transparency, and protect citizens from the brutalities of the unrestrained market” (Faux, 2002, p. 2). Many people are now calling for reforms of the financial systems, internationally. This includes international banking and finance, to reform of international financial institutions such as the World Bank. Part of reform suggestions also include giving more voice and power to poor countries, which typically have little say in how the global economy is shaped. Traditionally, powerful countries have resisted these calls that have been...

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