The global financial crisis (GFC) is when all sectors market economy in the world suffers from collapse. The global financial crisis started in Q3 of 2007 and turn into a deep recession in 2008. Stock markets are down 40% from the recent high, investment banks have collapse and also interest rates around the world have been cut. The effect of that were long-lasting unemployment and a huge decline in GDP. One of the causes global financial was the collapse of property in the US, this is happen when as supply property exceed demand and the homeowner owner who had taken out sub-prime loans was trapped, because they cannot afford their mortgage repayments and also could not sell their house. There were many factors that cause global financial crisis such as: monetary policy, global imbalance, conflict of interest, taxes and subsides.
Global financial could be happen again when the next generation did not learn from the past. The new trend causes global financial crisis is crypto currency as known as bitcoin, because this is new investment that gives high return and high and risk attract new investors to invest. The market cap of crypto currency has appreciate more than 1000% from 2015-2017. Delay regulated in crypto currency can make investor hurt and trigger the next financial crisis but it only has small impact in the world.
Many countries were affected during global financial crisis, and considerable slowdown in most developed countries. Many Asian countries stock markets suffer and currency values on depreciate. Export-import products and service Asian countries are slowdown in wealthy countries means Asian countries has a risk of job losses. Because economic in the world in a downturn, South Africa has entered into recession for the first time since 1992 due a decline in sector manufacturing and mining.
The possible causes of the Global financial crisis
The global financial crisis began to occur since august 2007, but the root of the crisis it happened from at several years earlier. Some professor economists are still doing the research to find what the main causes of the crisis are. From the studies that have been done, there at least 3 (three) thing that explains what is the causes of the global financial crisis.
1. Monetary policy
Monetary policy is the one of the cause crisis, during period 2002-2004 US has been led a surge in housing loans and Monitory policy in the spike of credit in housing. House demand in US will not exceed the supply if the US can control with monetary policy. Rising demand for house loans because the low of interest rate and also the homeownership programs through government agencies. These conditions push the banks to disburse housing credit aggressively and at the same time there is a decline standard of housing loans disbursement. Price of house rising, low interest rate, declining standard lending in the bank and government encouragement to increase homeownership is the combination that triggers an increase in loans for subprime loans.
2. Global imbalance
There are other factors outside of US monetary policy that push interest to depreciate. Government budget deficits and the low level of public savings have been considered the factor increase in current account deficits in the US. Global saving glut is where people choose to save the money rather than spend the money for real activity such as shopping. This phenomenon it happened in Asian countries since 1997 and the impact of that is the emerging market countries to be more cautious in managing foreign exchange. Global imbalance are also caused by developed countries already have good financial market and complex but developing countries are still survive with the financial market. with the limited financial market and global saving glut that happened in developing countries, it make interest for developing to invest in developed countries asset include US. Some of capital flow into US financial market and it considered one of the main reason why interest rate in US very low for some period. This low interest rate encourage people in US to consume more, including having some asset and impact of that saving rates people in US continue to decline.
Tax policy has significant impact on the cost, financial and capital. Capital gains tax need more progressive and the effect of that is for encourage the long term investment over short term more In the United States financial firms pay the taxes about 34% and it can deduct interest payments to creditors from taxable income.
Will GFC repeat again?
Yes, global financial could be happen again. After years of growth house prices start rising, unemployment in Us around 4%, American central bank rising interest rate and at the same time stock market has been appreciate. The economy and house market in United state has similarity in 10 years ago during financial crisis caused by sub-prime mortgage. The government must beware with this situation because bubbles could be burst anytime. Monetary policy could reduce financial crisis if the time and decision making in the right way. the government should regulated the new business and new investment such as crypto currency because if government late to make regulation and the new regulation from some country came as a bad news for investor it could lead to financial crisis with small impact, remaining crypto currency market cap has been growth sharply.
The scale and impact of GFC in economies of different countries.
The global financial crisis affected Asian economies very fast through trade and financial channels that reflection region to deep economic integration. Caused of that the Asians market export declined over 30 %, the emerging stock market prices in Asian fell down around 60% and also depreciate in exchange rates. First, started fall in export from Japan to Indonesia beginning from July 2007 until around February 2009. And then Intra Asian export that contracted by developed country fell down around 48% peaks to trough.
During Global financial crisis china has direct losses in the US capital market because before financial crisis china’s commercial bank had bought a mortgage back securities (MBS) and collateralized debt obligations (CDOs). And the total losses china had in these securities is $20 billion. There are two companies’ mortgages in US that china invested and if these two companies collapse china would have lost $800 billion in its official foreigner’s exchanges reserves.
The impact global financial crisis in Indonesia (my country) is having 2 impact in the economic, first is financial channel