Financial and Economic crisis, such as experienced between 2008 and 2009, is the state where financial institutions worth or the worth of assets falls fast and drastically. It is a panic-linked phenomenon which makes business people sell off assets at a go, or investors decide to withdraw their savings within a short span of time. These actions emanate from the anticipation of assets piece drops that causes a panic on the loss of value of their investments. Rapid sell-offs and savings withdrawal by investors leads to an economic recession or depression. A recession is a period of negative economic growth for two consecutive quarters which causes an increase in unemployment rates and more government borrowing, eventually leading to depression, which is a prolonged recession.
Predictors of Financial and Economic Crisis
Because of financial and economic crisis recurrences since the Great Depression, experts have undertaken initiatives to establish the root causes of the crises in a bid to determine early warning systems and indicators of an impending economic crisis. Notable predictors include a shrinking of international reserves to an alarming level (Frankel, & Saravelos, 2010). International reserves represent the currencies held in specific quantities by governments and institutions for international transactions. A drop in reserves levels indicates a negative effect on international trade and transactions that could result in a financial crisis. Another predictor is an increased rate of external debt commitments relative to the economy as a whole. If more countries become indebted to others, then there is an increased borrowing between interdependent countries and a financial crisis could be imminent.
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The economic situation and stability largely depend on investors and their activities. Movements in asset prices have a direct link to prevailing economic status, and may suddenly follow a common pattern in a mass anticipation of currency crises. Such a pattern may be a rise in asset sell-offs, or a mass withdrawal of cash from savings accounts leading to a financial crisis. This may also be as a result of a poor local market structure that discourages foreign investment, yet Foreign Direct Investment (FDI) in an economic and financial status indicator. FDI encourages various economic activities thereby increasing the rate of economic growth. A drop in FDI slows economic growth and may precede a financial difficulties and crisis (Alfaro, Chanda, Ozcan & Sayek, 2006). Moreover, frequent changes in currency rates in the international financial markets may indicate an increased risk of financial crisis. An overvaluation of a country’s currency can increase the prices of exports and reduce the prices of imports. The country can experience a depressed domestic demand and spend more on imports, signifying imminent losses, increased deficits or a run into debts.
Achievements and Pending Issues
Several interventions were taken to prevent the financial crisis from causing further deterioration of the economic into another economic depression. Primarily, most governments responded swiftly to address the issue by substituting private debt-led demand with a public debt-led stimulus, because the former had come to a standstill after the crisis. Governments that had friendly budgets implemented financial measures like discretionary tax cuts, a higher government spending or a combination of both, resulting in an estimated 1.7% fiscal stimulus to the Global GDP in 2009. The monetary authorities enforced a drastic reduction of interest rates to very low levels to encourage borrowing from the central bank by ailing financial institutions, thereby avoiding further significant job losses. Furthermore, the function of anti-cyclical macroeconomic policies in supporting existing jobs boosted the economy in a great way. The badly hit banks also received financial assistance in form of loan guarantees to enable borrowing from other banks and direct capital injections which helped to stabilize their financial situation and encouraged growth. Thirdly, for emerging and developing economies which depended largely on exports for their sustainability, attempts were made to circumvent insular resolutions that would worsen the breakdown in demand as well as business activities related to the crunch (Oliver & Aldcroft, 2007).
Regarding underachievement or pending issues in handling the crisis, the imbalances that led to the crisis were not addressed particularly regarding the dysfunctional financial system. The roots of the problem, which include the poor underwriting standards, lack of monitoring of systematic risks and unregulated capital pools, feeble functionality of credit-rating bodies and also inadequacies in risk control practices, have been overlooked. Also, the unemployment rate has increased over the years since the financial crisis because if poor employment strategies. Besides, new risks and threats to global development have emerged in some countries, for instance, the prolonged debt crisis in some European countries like Greece. Government debts continue to increase especially with the developing countries affecting their independence and self-sufficiency (Cassis, 2011). Lastly, there has been an emergence of a considerable moral hazard of bailing out banks and other financial institutions without enforcing effective reforms in the financial sector.
Conclusion
The Economic and financial crisis requires a collective approach by all nations in averting further deterioration in the global economy. Policies and strategies that are meant to improve the economy require consideration with respect to the change from a conventional policy formulation approach. The policies should encompass the re-evaluation of previously implemented policies and a deep assessment of the root cause of a financial crisis for better understanding and implementation of approaches meant to address the issue, otherwise, the world is still at risk of economic crises or recessions .
References
Alfaro, L., Chanda, A., Ozcan, S. K. & Sayek, S. (2006). How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages . NBER Working Paper No. 12522.
Cassis, Y. (2011). Crises & Opportunities: The Shaping of Modern Finance . New York: Oxford University Press.
Frankel, J. & Saravelos, G. (2010). Reserves and Other Early Warning Indicators Work in Crisis After Al l. Retrieved from http://voxeu.org/article/early-warning-indicators-and-2008-09-crisis-new-evidence
Oliver, M. J., & Aldcroft, D. H. (2007). Economic disasters of the twentieth century . Cheltenham, UK: Edward Elgar Pub.
