GLOBALFINANCIALCRISISFinancialMarketisamarketwhereparticipantsraisefundsfortheirbusinessactivities

GLOBALFINANCIALCRISISFinancialMarketisamarketwhereparticipantsraisefundsfortheirbusinessactivities,makeprofitsoutofthebusinesswhilemanagingtherisksinvolvedinthebusinessactivities.Globalfinancialcrisisisasituationofworldwideperiodofeconomicdifficultyexperiencedbymarketsandconsumers.Itisaperiodofdifficultbusinessenvironmentwhichbecameforceagainstbusinesssuccess.Overseveraldecades,theworldhadwitnesseddifferenttypesoffinancialcrisistoapoint,itseemednormaloccurrencetomany.Viennastockexchangecollapseof1873,thegreatdepressionof1930s,TheSavingandLoanCrisisof1980s,Bondandequitymarketcrashesof1987,tomentionjustafew.ThefinancialmarketwasconfrontedwiththeGlobalFinancialCrisis(GFC)whoseeffectswerefeltglobally.GFChadastrongeffectthatcutacrossmostcountriesoftheworldeconomically,politically,andevensocially.Afinancialcrisisoccurifinstitutionsorassetsareovervalued.The2008financialcrisiswastheworsteconomicdisastersincetheGreatDepressionof1929andisthemainfocusofthispaper.THEPRIMARYCAUSESOFTHEGLOBALFINANCIALCRISISDeregulationinfinancialindustryprimarilypermittedbankstoengageinhedgefundtradingwithderivatives,demandingmoremortgagestosupportprofitablesalesofthesederivative.1.Excessiverisk-taking:Marketplayersconstantlysoughtforgreaterinterestwithoutputtingtheriskfactorsintoadequateconsideration.ManyofthemortgageloansinUnitedStates,wereforamountsclosetothepurchasepriceofahouse.Alargeshareofsuchriskyborrowingwasdonebyinvestorsseekingtomakeshort-termprofitsby’flipping’housesandby’subprime’borrowers(whohavehigherdefaultrisks,mainlybecausetheirincomeandwealtharerelativelylowand/ortheyhavemissedloanrepaymentsinthe past)2.Increasedborrowingbybanksandinvestors:Duringthisperiod,banksandotherinvestorsborrowedincreasingamountstoexpandtheirlendingandpurchaseMBSproducts.Borrowingmoneytopurchaseanasset(knownasanincreaseinleverage)magnifiespotentialprofitsbutalsomagnifiespotentiallosses.Asaresult,whenhousepricesbegantofall,banksandinvestorsincurredlargelossesbecausetheyhadborrowedso much.3.Regulationandpolicyerrors:Regulationofsubprimewastoolax.Inparticular,therewasinsufficientregulationoftheinstitutionsthatUShousepricesfell,borrowersmissedrepayments.JimmyCarter'sDepositoryInstitutionsDeregulationandMonetaryControlActof1980(DIDMCA)phasedoutanumberofrestrictionsonbanks'financialpractices.Garn–St.GermainDepositoryInstitutionsAct,whichprovidedforadjustable-ratemortgageloanswhichresultedintoveryspeculativeandriskyrealEstateloan/investment.Gramm–Leach–BlileyAct,whichrepealedprovisionsoftheGlass-SteagallActthatprohibitabankholdingcompanyfromowningotherfinancialcompanies.Thisrepealdirectlycontributedtotheseverityofthefinancialcrisisof2007–2010.

THEMARKETFEATURESANDCONDITIONSTHATCONSTITUTEAFINANCIALCRISISINGENERAL.FinancialcrisispossessesthefollowingmarketfuturesAsymmetricinformation:informationaboutfinancialmarketrisk(eitherstructuralorsystemic)ismosttimesscarce,whichisdiscoveredtobecausedbylackoftransparencywithinthefinancialsystem;havingitslinktofraudandgreed.Asaresultofignorance,marketparticipantsarecaughtunawareofthemarketcrisisinherentintheuntamedrisk,whichleadtoseriousloss.Herdbehaviorofinvestors:thisisotherwisecalledmoralharzard.It'smarketfailurefeatureinwhichonepartyinvolvedinatransactionundertakesexcessiverisk,knowingthatdonothavetopaytheconsequencesofthatrisk.Adverseselection:isaninstanceofmarketfailurethat'salsorootedintheassymetryofinformationbetweenthebuyersandsellersthatexistsinthemarket.Inthepartofthebuyer,theremaynotbeenoughinformationastoaccuratelyassessthevalueofanobject.Heormayundervaluetheobjectduetothepossibilityofitbeendefective.Self-fulfillingpanics:thisistheaftermathreactionsofpeoplebymassivewithdrawaloftheirmoneyfromfinancialinstitutionswiththefearoflosingtheirmoney,depositorassettothefallingmarket.HOWTHEPRIMARYCAUSESOFTHEGLOBALFINANCIALCRISISLEDTOTHEFEATURESOFAFINANCIALCRISIS.Therewasanuncheckedovervaluedassetswhichwasexacerbatedbythemisbehaviouroftheinvestors.Withprofitmakingasthetarget,investmentbankscreatedcollateraliseddebtobligationfrommortgagepurchasedonsecondarymarketbutunfortunatelyinvestorsfailedtounderstandtheriskassociatedwithsubprimemortgagesbeenbundledwithprimemortgages.Homeloanstoindividualsandassetbuyerswerealreadyofferedwithpoorcredit(highratioloan),aspurchaserswerewithrelativelylittlecashorlowerincome.Ascollateraliseddebtobligationsbegantorise,subprimeborrowersbegantodefaultwhichinturnaffectedcollateraliseddebtobligationsinvestorsbecauseoftheilliquiditycollateraliseddebtobligation.THERESPONSEOFPOLICYMAKERSANDREGULATORSTOTHEGLOBALFINANCIALCRISIS.Withthedevastatingeffectofthefinancialcrisis,therewasurgentneedforfastactiontobetakentoaddressthepolicylapsesthatfueledthecrisis.OnNovember15,2008,PresidentBushconvenedaG20(madeupoftheworlddevelopingeconomiesandthemembersoftheG8)summittoaddresstheGlobalFinancialCrisis.Theaimwastodebateonhowtoaddresstheglobalcrisisanditsimpactsonsustainabledevelopment.WiththeG20summitof2018,therolesthepolicymakersneededtoplaywereaddressed.TheneedtoadoptsoundmonetarypolicywasidentifiedandG20furtherstrategizedonhowtotakeadequateactions.AccordingtotheStatementofthesummit,thefollowingweretobeadoptedinordertoreformthefinancialmarket:

1.StrengtheningTransparencyandAccountability2.EnhancingSoundRegulation3.PromotingIntegrityinFinancialMarkets4.ReinforcingInternationalCooperation5.ReformingInternationalFinancialInstitutionsInresponsetothis,WorldBanksetuptheVulnerabilityFinancingFacilityforcountrieshardesthitbythefoodandfinancialcrises3Theinternationalfinancialarchitecturewasreformedtoaddressthemajorsourcesoffinancialinstability(policies,marketsandthecurrentinternationalreservessystemcenteredonthedollar)2Also,governmentsadoptedthefollowingmeasuresamongothers:1.Lowerrateinterest:Quantitativeeasingthroughloweringofinterestrate.Centralbanksloweredinterestratesrapidlytoverylowlevels(oftennearzero);lentlargeamountsofmoneytobanksandotherinstitutionswithgoodassetsthatcouldnotborrowinfinancialmarkets;andpurchasedasubstantialamountoffinancialsecuritiestosupportdysfunctionalmarketsandtostimulateeconomicactivities.2.Increasedgovernmentspending:Governmentsincreasedtheirspendingtostimulatedemandandsupportemploymentthroughouttheeconomy;guaranteeddepositsandbankbondstoshoreupconfidenceinfinancialfirms;andpurchasedownershipstakesinsomebanksandotherfinancialfirmstopreventbankruptciesthatcouldhaveexacerbatedthepanicinfinancialmarkets.3.Strongeroversightoffinancialfirms:Amongmanynewglobalregulations,banksmustnowassessmorecloselytheriskoftheloanstheyareprovidingandusemoreresilientfundingsources.Regulatorsarealsomorevigilantaboutthewaysinwhichriskscanspreadthroughoutthefinancialsystem,andrequireactionstopreventthespreadingofrisks.THEDOWNSIDESANDUNINTENDEDCONSEQUENCESTHATCANOCCURWHENAPPLYINGREGULATIONANDPOLICYTOTHEFINANCIALMARKETS.Therealityisthatbusinessisprofoundlyglobalbutgoverningislargelynational.Divergenceleadtounintendedconsequences.Anumberofconsequences?-?bothintendedandunintended?were?onconsumers,households,andventurecapitalfirms.ThefinancialcrisiswaslargelyaWesternaffair,centredinthebankingsystemsoftheUS,theUKandtheeurozone.Butitsimpactswerepervasivelyglobalandstubbornlylong-lasting.Thisisalsotruewithregulationsimplementedinthewakeofthefinancialcrisisandreformstotheglobalfinancialsystem.THEFEATURESOFFINANCIALMARKETSWHICHOFTENNEEDREGULATIONInformationassess:theabilityofpricestoadjustfreelytogiveparticipantsinformationaboutthevalueandriskofvariousfinancialproductsandservicesimpliesthatthereisneedforthisinformationtobecorrectlyandefficientlydisseminated.Thereisneedtoregulatethisareain

ordertoensureaccurateinformationisavailabletoeverybodyforinvestmentdecisionmaking.MichaelA.S.(2008)inLessonsfromfinancialcrisisspokeontheneedforamajorregulatoryoverhaultoimprovetransparencysothatmarketparticipantswillbearmedwithbetterinformationwhichwillenablethemtodetectandmanageriskbetter.Thiswillinherentlycontroltheherdbehaviourofinvestorsalso.REFERENCES1.MartinNeilBaily,RobertE.Litan,andMatthewS.Johnson;2008.”TheOriginsoftheFinancialCrisis”.2.YilmazAkyuz;2009.”PolicyResponsetoGlobalFinancialCrisis:KeyIssuesforDevelopingCountries”.3.BryonyOrtlepp;2018.”WorldQuantUniversity,FinancialMarketModule2:MarketRegulation”4.Financialcrisis.https://www.investopedia.com/terms/f/financial-crisis.asp5.MichaelA.S.(PhD)2008.LessonsfromtheCrisis.PacificInvestmentManagementCompanyLLC.www.pimco.com.6.MihalySimai:Thebackground,characteristicsandconsequencesofthecurrentglobalcrisisandthetransitiontothepost-crisisworld.DélkeletEurópa–South-EastEuropeInternationalRelationsQuarterly,Vol.1.No.3.(Fall2010)pp1-10.