According to Prof. Akbar (2009), financial crises normally have three characteristics namely; the asset market which if collapses, takes a long time to recover and has adverse effects on the economy. The second characteristic that portrays a financial crisis is the banking sector which is normally associated with output and unemployment. The third characteristic that he talks of is the real value of government debt explodes. According to him, if anything happens to negatively affect the three, there will be high debt increases that will in turn lead to the collapse in tax revenues. We therefore ask ourselves, was it these three characteristics that really caused the current world economic and banking crisis?
Rise of the Current World economic Crisis
According to Ambrose (2009), borrowing-to-incomes ratio in the UK begun rising by 48 per cent or 46 percentage points of personal disposable income in 1998. The increases in debt-to-income ratios on this scale resulted from the low inflation and low real interest rate environment that has been established in the past decade. This was followed by a decline of the Gross interest payments on debts especially in the UK, where the interest rates were 16 per cent below the 7.5 per cent per annum. However, according to Prof. Akbar (2009), real problems began to emerge in the financial markets in June 2007 as a result of debt defaults especially on the US housing lending to individuals with low credit ratings. The globalization of financial markets meant that such risks were shared across banks throughout the world making many European banks to suffer major losses as a result of purchasing many of these assets. The Economist (2008) adds that for many months before September 2008, many business journals published articles warning of the financial stability of leading U.S. and European banks and insurance firms.
It was indeed true that large financial institutions in the United States and Europe faced a credit crisis due to failures caused by misapplication of risk controls for bad debts and collateralization of debt insurance. This in turn led to a slowdown in the world’s economic activity. The crisis developed quickly and spread until it became a global economic shock. This resulted to the failure of a number of banks in Europe and decline in the stock indexes world wide. There was also a large reduction in the market value of both equities and commodities. With time, the financial crisis within the financial institutions accelerated a liquidity crisis thus successfully decreasing international trade. The situation worsened further when a currency crisis developed despite intervention by world leaders. Investors did not make the matters any better when they altogether started transferring vast capital resources into stronger currencies such as the yen and the dollar and by so doing led many emergent economies to seek aid from the International Monetary Fund (Vikas Bajaj 2008).
Action by Governments
As per Vikas Bajaj (2008), the world needs to look beyond resolving the current crisis to the underlying role of a new multilateral network for a new global economy. There should also be a reform of the International Monetary Fund and the World Trade Organization with the warning system for the global economy should being strengthened, and focused on crisis prevention rather than crisis resolution. Ambrose (2009), also states that economic multilateralism must be redefined beyond the known traditional focus on finance and trade. This is because in the current world, the energy change, the climate change and the stabilizing fragile and post-conflict states are the main economic issues. For there to be an amicable solution to the crisis, international security and environmental dialogue must be accepted by all the countries that must as well also concern themselves with economic multilateralism.
According to The Economist (2008), for the world and banking economic crisis to placed at a check, the group of the seven advanced economies should lead the rising economies and a new steering a new steering group that includes other countries such as Brazil, China, and South Africa, and the current G7 should be put in place and such a group should represent 56 percent of the world’s population and 70 percent of global economic output.
The proposed changes are a means of trying to create a new world where all the economies are run as one, their banking system operate as one and their financial markets are at the same level. This means that the elevated and financial stable countries like the U.K will be an important tool in bringing up and stabilizing the economies of the developing countries like those in Africa. Also, it will help in the creation in a new world order and world peace where everyone will be termed a citizen of the united world. As Prof. Akbar (2009), notes, a new trade facilitation and development agenda will ensure the lowering of interests and multilateral trade thus encouraging integration, efficiency and investment opportunities. This will be an indication of many jobs, rapid economic growth and a reduction in poverty levels.
Evans-Pritchard A (2009) Dollar tumbles as huge credit crunch looms. Available: http://www.telegraph.co.uk/finance/economics/2812880/Dollar-tumbles-as-huge-credit-crunch-looms.html 20 April 2009
Bajaj V (2008) Stocks Are Hurt by Latest Fear: Declining Prices
Available: http://www.nytimes.com/2008/11/20/business/economy/20econ.html?_r=1 20 April 2009
Prof. Torbat E A (2009) Global Financial Meltdown and the Demise of Neoliberalism, Available: http://www.globalresearch.ca/index.php?context=va;aid=10549 20 April 2009
The Economist (2008) Structural Cracks Available: http://www.economist.com/finance/displaystory.cfm?story_id=11412394 20 April 2009