Introduction
Nowadays, the world can be said is driven by capitalism because of the need of financial force to get everything into place. Money is needed to run businesses, organizations, even countries. Without money, there will be chaos, and resources would not be effectively allocated for human needs around the globe. The word money can be translated to anything which has a value that can be measured, accepted medium of financial exchange, and have the power of purchase saved or stored (BusinessDictionary.com, 2018). However, the financial state itself is not stable and vulnerable to fluctuation if it slipped from its track. The effect if something in it goes wrong can be either an inflation at the financial market or worse, economic financial crisis. The word financial crisis itself defined as a situation when there has been a shortage of money caused by the increase demand of money, while supply is limited (BusinessDictionary.com, 2018). The latest major global financial crisis was between 2007 and 2009. However, it doesn’t end there, the crisis may have gone for a few years, but the cost and the impact of it still far from recovery.
How it all began
The 2007-2008 global financial crisis was the worst after the great depression in America. It all started in 2007 at the United States with a credit squeeze. Credit squeeze happens when governments try to control inflation by increasing loan restrictions to customers and small businesses (BusinessDictionary.com, 2018). Move back a little, the first sign of the issue was in 2006 where there was a spike in the housing market. Housing market was such a trend because of low interest rates and increase in property prices, which pushed investors to take loans to buy houses. Even banks were encouraging households to borrow up the full value of their property. When the price rose, they were more encouragement by banks to buy the house with loans (Carmassi, Gros and Micossi, 2009). Therefore, there were many homeowners with doubtable credit which the realtors failed to realize. People took out loans for 100 percent or more of the prices of their new homes because the banks had allowed them to do so (Amadeo, 2018). This effect made a bubble which will pop and triggered the crisis. When the bubble popped in 2007, people started to stop paying their house mortgages because the price of their property drops significantly and banks were in a situation where the repossessed properties was significantly lower in value compared in which the bank had loaned out at the first place (Justine, 2017). This then led the banks to suffer credit crunch. The credit crunch was such a thread, big banks are starting to fall towards bankruptcy.
Too big to fail
The Unites States Federal Reserve Bank started to inject liquidity in the economy to jump start it, however, it clearly didn’t work at all, banks were starting to collapse. Bailing out big banks from bankruptcy is the only best hope for the US to keep their economy alive. In the summer of 2008, the Federal Reserve starting to bail out companies such as investment bank Bear Stearns, JP Morgan, Fannie Mae, Freddie Mac, and the most famous of them all, insurance company AIG (Amadeo, 2018). These actions were looking good until the government allowed the investment bank Lehman Brothers to go bankrupt. Many believed the government would bail them out too because the bank was “too big to fail’, unfortunately not. They filed for bankruptcy in which they gave a red flag to other banks that they are too at risk and created a domino effect through the global financial system (Elliott, 2011).
On other continents
Those big banks which were deteriorating was also affected the European banks. The news was spread throughout Europe. People starting to withdraw cash from their banks because of panicking. It also effected the stock markets to plummet because of people also withdrawing their stock shares (Landler, 2008). In UK, Lloyds banks took over Halifax Bank of Scotland, because of its shares fell. It also leads UK to lose a third of its savings and mortgage market (BBC News, 2010). Europe has another issue regarding Greece going bankrupt as a nation. After it adopted the Euro as its currency, the public economy was shocked because of their increase in currency exchange value, it caused the public spending to rocketed and created its own problem (BBC News, 2012).
In the winter of 2008, a group of newly developed country leaders called the G20 attempted to prevent the recession to go any worse. Interest rate was minimized to jumpstart the economy. At London G20 summit, five trillion of dollars were agreed to be committed to help the international monetary funds, and also to boost banks and job opportunity to push the economy from a hold (Elliott, 2011). At the summer of 2010, European union agreed to help Greece financial problem because of the on growing budget deficits and so other countries were worried about it (Elliott, 2011). Furthermore, Italy and Spain needed to sell bonds to the European Central Bank because they were both in a debt crisis, like Greece. Greece received 110 billion Euros from IMF and the European union. Greece also increases their taxation to recover from their loans (BBC News, 2012).
In Asia, in the last three months of 2008, the GDP fell almost 15 percent. The crisis impacted almost the whole Asia, except China and India. This is because most of Asian countries relies on the US economy, except China which has its own independent market. However, many economists were surprised, because Asia was actually leaded the economic recovery when the crisis had come to an end (IMF, 2009).
In the end of all the chaos
The 2007 to 2009 global financial crisis cost values to drop, banks to file for bankruptcy, and even tore down a country’s economy. World’s largest economy leaders agreed on putting 1.1 trillion dollars to tackle the global financial crisis. The G20 meeting was formed on this period of time to maintain the stability of the world’s economy. This is a turning point in the crisis as described by US president, Barack Obama (News.bbc.co.uk, 2009). In total, the estimated cost of the whole crisis ranged from 6 to 14 trillion dollars (Luttrell, Atkinson and Rosenblom, 2013).
Conclusion
In the end, this crisis cost not only in financial loss, but also the public trust and the investment banks trust. All of this could be prevented if there were concrete policies on buying and selling housing with the limited prices. In economy, there are terms called price ceiling and price floors. If countries such as the US used this policy beforehand, the sub-prime housing bubble will not be as big as it was, the credit crunch would not have happened, and the major banks would not have any problems. In Europe, there can be a policy in which it will limit the public spending on imported goods to keep the money stable and the economy flows in the country and it won’t flow to other countries, especially in Greece, Italy, and Spain. Furthermore, countries should help each other to caution other nations to be aware of what is coming. If all of these policies and ideas were applied beforehand, there would not be any recession which leads to a global scale financial crisis.