The financial crisis that crippled most of the world economies in 2008 and part of 2009 had a big impact on the financial systems all over the world. A financial crisis is a situation whereby financial assets and institutions lose their value all over a short period of time. Most of these financial crises result from panic banking activities, currency crises, stock market crashes, sovereign defaults and bursting of other financial bubbles in the world economies. The financial crisis peaked in September 2008 in the United States as well as the whole world. Before this period, the crisis had been publicized severally in economic forums, journals and other forms of media. During this period, there were rampant failures, conservatorships or merges of many large American financial firms on Wall Street. Financial Bodies like IMF produced a poor forecast of the future; "In the event of further delays in implementing comprehensive policies to stabilize financial conditions, the recession will be deeper and more prolonged," the report says.
The financial crisis had very many negative effects on the governments of various nations, small business enterprises, banks, other financial institutions and the general public as well. The crisis led to a condition of destabilization in governments, financial institutions because of the steep fall of the value of many currencies all over the world.
The financial institutions suffered the most during the recession. In America and Europe, many insurance firms, investment banks, and mortgage institutions made big losses because of the speculation that went on at that point in time. Investors withdrew their money from these institutions for fear of the firms going under with their money. This resulted into the evolution of credit crises, steep falls in shipping and deflation which led to the declines of some stock indexes. Some European banks also went out of business. The value of commodities and equities also fell worldwide. These financial institutions accumulated debts since most of them had to borrow money from other institutions to stay in business. Others made so many losses that they had to shut down since they could not cater for the business future existence. That was a result of investors fearing to invest their money for fear of making losses. The rate of inflation made the situation worse because the money and assets owned by the financial firms lost most of their value leaving them poor and exposed to the tough financial times. Therefore, banks made losses, lost customers, assets depreciated and most of them cut down on the costs by retrenching their workers. This was the same case for the stock markets and financial markets.
The European real GDP during the crisis dropped by 4%, the biggest drop since the 1930s. The crisis was preceded by successful economic periods of credit growth, high liquidity and low risk premiums. There were also high asset costs and bubbles in the real estate industry. The high leverage in many European firms led to vulnerability to asset market corrections. Large scale bank withdrawals were not rampant, the governments introduced fiscal stimulus and monetary policies were eased. All these were aimed at neutralizing the effects of the depression. Many firms had solvency concerns, others collapsed. Firms like Freddy Mac and Fannie Mae were rescued from collapsing. Others like insurance powerhouse AIG and Lehman Brothers faced bankruptcy. European governments had to act fast to dilute the sharp downturn by introducing appropriate monetary policies. The senior financial and government officers met to deliberate on the matter. "The ministers of finance would be preparing for these two summits,"
"Further reform of the G8 should be considered to make this group more inclusive of emerging countries," says the document, adding that "further association of emerging and developing countries is essential" to increase legitimacy of institutions like the IMF.
The governments of world nations, from developed to developing countries, faced a tough task dealing with the economic recession. The recession had ravaged the financial sectors of these nations. The banking systems had been depleted, the currencies had lost their value and most of their resources had been channeled to reducing the effects of the recession. The governments had the task of formulating financial and other monetary policies that could reduce the negative effects on the economies. The governments had to print more cash, order the central banks to implement appropriate policies to beat the tough times. These resulted in heavy expenditures for the government. The governments also had the hard decisions of reducing their workers through retrenchments.
Another group of institutions that had the backlash of the recession is that of the small businesses. Small businesses form a major backbone of a country’s economy, especially in developing economies. During and after the recession, small businesses suffered a big deal. With the rampant inflation, the businesses made losses since their assets and inventories lost value. The businesses also lost most of their customers because they could no longer afford the goods and services that the firms offered. The firms were victims of circumstances when they were forced into making hasty decisions to ensure the business survives the tough times. The recession led to many small businesses shutting down, others were left with large debts that they could not manage.
The general public must have been the worst hit group by the effects of the financial crisis. The people from all the rich and developing countries felt the pinch of the recession. There were millions who lost their jobs when firms and governments were forced into sacking their workers in an effort to cut down on costs. These led to increase in the rate of unemployment and to some extend poverty. This is because the unemployed individuals could not support themselves and their families due to no income. Other individuals suffered because there were price increases in commodities due to inflation. People could not afford the high cost of living. The public were left at the mercy of government, financial institution and other businesses’ decisions. The public are consumers; they were affected by every price increase in commodities. The public are also the employees, they were affected by whatever action the employers and government took about the labor force.
Therefore, the financial crisis had a big impact on the world economies, both at the macro and micro levels. The crisis must have left the world in a mess but there were actually lessons to be learnt from it. The crisis resulted from poor decision making and policies that were not appropriate. The economists should formulate effective policies that will lead the world economy to stability and not to what we experienced in 2008.
Reference
BBC. (2009, March 19). NEWS. Retrieved February 15, 2012, from BBC: http://news.bbc.co.uk/2/hi/business/7952377.stm
Bezjak, F. (2010). Global Economic Trends and Their Impact to Corporate Development. Norderstedt: BoD – Books on Demand.
Mathaba. (2008, November 04). Mathaba. Retrieved February 15, 2012, from Mathaba: http://mathaba.net/news/?x=610640
Talbott, J. R. (2010). Contagion: The Financial Epidemic That is Sweeping the Global Economy and How to Protect Yourself from It. Hoboken, New Jersey: John Wiley & Sons.
