Introduction
A depression is a severe economic downturn that lasts for several years. It is characterized by falling Gross Domestic Product (GDP) and high unemployment rates.What started as a financial crisis in the United States has quickly unfolded into an economic crisis. The very first impact of this crisis was felt through rapidly declining equity markets. In some cases coupled with massive outward capital flows. This was an indication of massive retraction of investment from the market. Recession causes a downfall in macroeconomic indicators, such as investment, employment, household income, profits etc. This leads to a rise in unemployment rate and bankruptcies. The economists and analysts came together on the point that this financial crisis of 2008 was the worst since the Great Depression. The UN Conference on the World Financial and Economic Crisis and its Impact on Development (24-26 June 2009, New York) expressed the consensus of the world leaders about the 2008 financial crisis,
“Which began in the world’s major financial centers, has spread throughout the global economy [and is] negatively affecting all countries, particularly developing countries, threatening the livelihoods [and] development opportunities of millions of people.”
Global Implications of the 2008 Financial Crisis
Phillip Swagel in his report on the ‘The Cost of the Financial Crisis: The Impact of the September 2008 Economic Collapse’ addresses the 2008 financial crisis as
“ a severe recession accompanied by massive job losses, skyrocketing unemployment, lower wages, and a growing number of American families at risk of foreclosure and poverty”.
In a study Reinhart and Rogoff stressed on the fact that “the major episodes are sufficiently far apart that policymakers and investors typically believe that ‘this time is different’,” they warned that “the global nature of this crisis will make it far more difficult for many countries to grow”.
In addition to this Reinhart and Rogoff found that the 2008 financial crises resulted on an average, in a 35 percent real drop in the housing prices over 6 years whereas the equity prices fell to 55 percent over 3.5 years. The Output fell by 9 percent over 2 years. The unemployment however rose to 7 percent over 4 year’s period and the central government debt rose to 86% in comparison to the pre-crisis statistics.
In the last quarter of FY2008 and in the first quarter of FY2009 the economic activity in the United States and many other developed and undeveloped countries declined drastically, which lead to a significant decline in the unemployment level.
The economic downfall of 2008 had its impact on almost all big and small economies yet this impact was not uniform when talking about the real and financial sectors. There was a considerable difference between the response of the weaker economies and that of the stronger ones. The countries with structurally strong economies countered the issue in a better way while others had to strive hard via extensive stimulus policies to recover from the adverse effects of the crisis.
As the economic crisis spilled over from the United States and hit Europe with full intensity and the wave went on putting devastating impacts on the Asian and other smaller economies. The liquidity started to dry up which consequently created problems for the financial institutions around the world, due to which these institutions started to withdraw funds from every available resource in order to remain liquid. This curtailed the capital flows to many emerging and developing economies raising the cost of credit and exerting depreciation pressure on the forex rates. It has now become almost impossible for these economies to refinance themselves in the international markets.
Talking of the industrialized world which contributes more than 60 % to the world’s output; the exports, especially from the developing countries declined and the flow of remittances to the developing countries from the industrialized countries was affected badly. Also this slowdown in the world growth has put adverse effects on the commodity and energy price levels.
Another sector that was hit badly by the economic crisis was the banking sector; in fact a deregulation in the banking systems in the US was one of the root causes of the crisis. The number of bad debts rose to a significant level which threatened the solvency of the financial institutions. Secondly the interbank lending market was affected by the change in the Federal Reserve policy that was brought in to counter the prevailing issues, the banks became uncertain and ceased further lending and the money supply was diminished to a considerable level. As a reaction the stock market investors showed hesitation in sending the bank shares to freefall. All these lead to a massive downfall in lending of the banks.
Conclusion
The 2008 financial crisis reflected the most significant international economic events since the great depression. What would be the replacements will not only depend on the objective situations but also on the ability of the economies to recover and retain their own vision relying on need rather than the profits as the finance driven policies of the past twenty years.It’s been five years since the financial crisis hit the world economy and the world is still recovering from its aftermaths. The turmoil so created is now breaking down. The major emerging economies like Brazil and China have shown impressive improvement towards the process of stabilization.
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