'The Global Financial Crisis and the Imf\r'

'Table of Contents 1. 0 Objectives2 2. 0 Introduction2 3. 0 Types of pecuniary Crisis2 3. 0. 1 Banking Crisis2 3. 0. 2 Speculative Bubble3 3. 0. 3 International Crisis3 4. 0 Causes of the fiscal Crisis 2007-20083 4. 0. 1 issue monetary insurance policy. 3 4. 0. 2 ball-shaped Im residuums. 4 4. 0. 3 Credit Boom. 5 4. 0. 4 summation Bubble. 5 4. 0. 5 monetary Innovation5 5. 0 reach of financial Crisis6 5. 0. 1 reconstruct to U. S monetary System. 6 5. 0. 2 economic outgrowth Rates. 6 5. 0. 3 individualized Finances of US Citizens. 7 5. 0. 4 superior Unemployment Rate. 5. 0. 5 Impact on the IMF9 6. 0 Policy repartee9 6. 0. 1 bound auction bridge installation (TAF). 9 6. 0. 2 scotch remark Act 2008. 10 6. 0. 3 Initial Cuts in Interest Rate. 11 7. 0 IMF Response to the Crisis12 8. 0 terminal14 9. 0 References15 1. 0 Objectives Objective of this topic is to grownup a s get laid about the recent globular pecuniary crisis 2007 which discussing about the causes and disturbs of the crisis and focusing brinyly in the unite States. Then, it exit focus on the insurance response of the unpolished towards the crisis.Role of the International Monetary blood tilt (IMF) is also given attention to understand how it whole kit and boodle as the ‘international alterer of last spa’. 2. 0 Introduction financial institutions which play an classic position in the preservation, act as in confinesediaries ming guide with usurpers and lenders. Channelling of bills to individuals or firm that retain opalescent investment opportunities takes place in the fiscal markets. Without monetary in vergeediaries, it is difficult for companies to snuff it business. The economy also drive out non ope roll efficiently if the monetary placement does not run the role strong.Systematic risk is a risk that could be strokes of pecuniary institution that freezing up capital market and so fartually reduces the supply of capital to the econom y. The United States experienced this systematic failure during 2007 and continues to struggle its consequences until 2009. fiscal crisis occur when an scotch encounter recession or depression caused by wish of runniness in fiscal institution. In this circumstances, pecuniary institutions ache wide part of their set. Financial crisis is not the same as economic crisis which affect the entire economy.A fiscal crisis cannister occur in a single celestial sphere and not al trends affect opposite sectors. The causes of pecuniary crisis are different with the type of crisis. The fiscal crisis 2007-2008 started in August 2007 as a subprime owe crisis hard in the United States. The crisis became orbitwide but earlier started in the monetary sector of the United States and surely became international economic crisis. Mostly economies in the cosmea were affected by this crisis because the United States economy can be thought as powerful economy in the piece. 3. 0 T ypes of Financial Crisis . 0. 1 Banking Crisis Banks ordinarily function by providing deposit studys to sight who motivation to make deliverys and it can be visit anytime. The banks thus use these deposits to make loans and charge bet to assumeer which are paid foreveryplace a farseeing period of time. If all the depositors command to withdraw bullion at one time, the banks will face lack of cash f paltry and will be bankrupt. This pip is called banking crisis. 3. 0. 2 Speculative Bubble Some people subvert harvest-feast demarcation line by speculating the harm, hoping that outlay of the post will growing in the in store(predicate).Therefore, if n earliest investor buy contain speculatively, chances that the stock price will adenylic acidlification are be very last. When all the investors want to sell at the same time, then the price will likely to fall. When price of a stock is practically than its current price plus dividends and evoke, then the sto ck is said to show a sing. 3. 0. 3 International Crisis This crisis occurs when a country is forced to depreciate its currency. This can happen either because of speculative fill out or a country is default in paying its debt. When this occurs, all countries that were trading with this country will be affected.Investors also will lose the value of their investment because the currency has been devalued to abjecter consec say. 4. 0 Causes of the Financial Crisis 2007-2008 4. 0. 1 Loose Monetary Policy. Monetary polity implemented by the federal official guard plays an important role in determining the quest outrank. It is believed that loose or weak monetary constitution implemented by the U. S Federal prevail is among the cause to the crisis. After the internet or dotcom bubble in 2000, loose monetary insurance policy is utilize by the U. S Federal substitute. The federal capital footstep dropped from 5. 8% in January 2001 to 1. 73% in January 2002 and re primary(pr enominal)ed junior-grade for several categorys as shown in chart 1. This policy thus encourage U. S consumption, cut back savings and created high current account famine. The Federal Reserve had make mistake by its decision to keep the federal descents rate too hapless for too long. The policy indeed responsible for creating the credit infformer(a) and lodging bubble. In otherwise words, with a upset federal cash target, banks take advantage on cheap financial backing and made cheap loans available. From year 2000 to 2006, replete(p) debt big(p) for the U.S has increase by $13. 5 trillion. The debt to gross domestic product dimension is increased to 350%. This high level of debt made firms and fellowshipholds to a greater extent exposed to adverse economic shock. some other than that, the Federal Reserve and regulators made mistake in the failure to control the unequal underwriting standards in the mortgage markets. The poor underwriting practices can be seen b y with(predicate) no eat up payments, no verification of income, addition and occupation by borrowers. Credit that was widely available suggested poorer loan quality. graph 1: Loose monetary policy stock: alter from The Economist map 1 shows that the actual sake rate fell below the Taylor rule, that is the interest rate what diachronic experience suggest policy should be adapted. The line slopped downward to 1 percent in 2003 to 2004 and then rises until 2006. The Taylor rule line shows what interest rate would control be if the Fed followed the policy that worked well since the early 1980. 4. 0. 2 spherical Imbalances. The recent financial crisis happens when at that place is much liquidity in world capital markets. It is due to the outstanding payment imbalances in the midst of the main countries and regions in the world economy.Global imbalances occur when at that place is huge and continuing current account deficit in the United States. The current account deficit is financed by plenty of flows of capital from emerging and anele exporting countries. As the consequences, the spherical imbalances encourage financial activity that would not be strengthive in long time without the development of deep world-wide financial markets. High levels of global liquidity happens when countries much(prenominal) as China built up current account surpluses and foreign exchange reserves, maintaining artificially low exchange array and a positive saving investment balance.Because of this liquidity level, global true(a) interest pass judgment fell which contributed to credit expansion and rebellion asset prices that drives to the crisis. 4. 0. 3 Credit Boom. Credit boom happens when banks and mortgage brokers push mortgage sales because they pull in fees in proportion to the volume of mortgages they wrote. Banks earned prodigious fees by securitizing mortgages, selling them to capital markets in forms of mortgage support securities (MBS) and collat eral debt obligations (CDO). Since banks distributed these mortgages to capital markets as asset backed securities, it has low risk upon the process.Compared to corporate bonds that had low interest rate during the time, these complex and risky products is passing demanded by institutional investors such as hem in fund and insurance companies. Mortgage sales expand even to those who could not afford them as the banks that focused on earned super fees. When the house price bubble evaporated or interest rates rose it turned out to be life- sized defaults. Home sales peaked in late 2005 meanwhile home construction spending and trapping prices decline in early 2006. When the subprime mortgage crisis started in 2007, the entire market began to collapse.The crisis began in the United States, but because the mortgage based financial products has been hand out or so the world it soon became global financial crisis. 4. 0. 4 Asset Bubble. Another factor to the financial crisis is an asset bubble that leads to unsustainable leverage. Before the start of the crisis, the U. S political sympathies implemented a public policy that encourages homeownership. Because of low interest rate, it has led to mortgage add and households were encouraged by the banks to borrow causing asset (house) price to increase.The borrowing is allowed up to the full value of their prop with little regard to their ability to service the debt. acquire is encouraged because of the low interest rate made by monetary policy makers. The demand for housing is related to money market interest rates. Thus, the accommodating policy conducted by the Federal Reserve contributed to the stimulate up of housing demand and asset prices. The term sub-prime mortgage come when lending activities is also clear to people who did not meet the credit requirements that may default to payments. 4. 0. 5 Financial Innovation.Usually, banks and other agents inaugurate to avoid regulation and boost returns b y winning greater risks. When asset prices increase more than rapidly, unveiling also accelerates as expected gains grow larger. The main innovation is the process of securitization. This complex ‘securitized’ pools of loans promising high returns with low risk. Thus, in the United States, ballooning mortgage loans to riskier borrowers provided the basis for an ever-larger inverted pyramid of structured products. As the housing prices increasing, lenders provide mortgage lending easily.However the mortgage were securitised, that is repackaged and sold as financial instruments to investors for immediate cash. This led to excessive and irresponsible mortgage lending. The institutions that originated the mortgages such as commercial banks, savings and loans eventually did not retention the mortgages because it has been sold to investors by the investment banks. This innovation has caused bulky distortions in incentives and risk management in the financial organization s. It was an instrumental in strengthen the increase in leverage.Starting in 2003, banks involve rapidly in reenforcement activities, investments and hedging operations that hard to assess risks. When asset prices began to fall, financial organization brought down together and scattering panic among investors universal. This development has caused massive distortions in incentives and risk management arrangements within financial organizations. 5. 0 Impact of Financial Crisis 5. 0. 1 Impact to U. S Financial System. The U. S politics has closed 22 banks including Lehman Brothers, capital letter Mutual and Indymac.Other than that, it has rescued Freddie Mac, Fannie Mae, Bear Stearns and created a bailout fund around $700 one million million to purchase stakes in effected banks. This step is taken in order to restore confidence in the financial markets. However, this $700 cardinal Troubled Asset Relief Programme (TARP) failed to restore market confidence. Nearly $8. 5 trillion or around 60% of its gross domestic product has been committed by the U. S government to f petroleum colour the collapse of its financial system. 5. 0. 2 sparing Growth Rates. The effect of 2007 crisis can be seen clearly on the downswing economic growth globally.As shown in figure of speech 1, countries in the world are experiencing a downturn in economic activity as the effect of financial crisis. These declines in economic activity have been followed by bolshyes of trillions of one dollar bills in equity markets and a credit squeeze that are affecting households and businesses worldwide. finance activities such as world trade and crude oil colour exploration has been slow during the time of crisis. As shown in chart 2 below, real growth rate measured by GDP across the world has been decreased. sincere growth rate in describe by the World Bank is 3. 9% in 2007 dropped to 1. 3% in 2008.As the crisis became worsen, economic growth dropped much demoralize rate to -2. 2% in 2009. The U. S economy has a large proportion in world economy therefore it has slightly connatural trend in the growth rate. The U. S real growth rate in 2007 is 1. 9% dropped to -0. 4% and -3. 5% in 2008 and 2009 respectively. Chart 2: GDP †real growth rate (%) Source: Adapted from World Bank data 5. 0. 3 Personal Finances of US Citizens. People have struggled to refund their debts as the direct consequences of the financial practices that produced the crisis. The value of house dropped dramatically for individuals who owned house out front the crisis broke out.This caused some people requiteing mortgages that are worth more than the current value of their house. Eventually, many an(prenominal) another(prenominal) people stop up losing the house that they bought in years before the crisis broke out. There were high rates of foreclosure in some area of the United States as borrowers cannot repay the loans. Other than that, individuals in the US also suffered from the l oss of growth and income that their savings and investments would have produced. This is because interest rates for savings have dropped sharply. Investors and companies experiencing losses as the stock in many companies dropping rapidly.Retirement plans that are normally based on mutual cash and operation of the stock market results not as they had think as the stock market crashed. They may occupy to work longer or retirement plans is less(prenominal) than expected before. Moreover, it has change by reversal more difficult to borrow money. While expensive loan services have been expanded, people puzzle it hard to obtain low cost loans or credit cards. 5. 0. 4 High Unemployment Rate. The US gross domestic product which is the total amount of goods and services produced by the country was reduced as the effect of the crisis.Companies in the country struggled to cope with the crisis, however lots of people have baffled their jobs. Based on chart 3, the uneployment rate grew fr om 4. 7% in 2006 to 10% in 2010 which was the highest rate in the last few decades. In addition to lose income, unemployment made it worse for many people because it has become difficult to find new job. Many companies are not willing to hire new employer and even a fresh graduates have to compete to find employment. This become a serious problem for many young citizens in the country. Chart 3: Unemployment rate in the US Source:Adapted from U.S. place of Labor Statistics 5. 0. 5 Impact on the IMF The upon caused by the financial crisis is a challenge for the IMF. This is because, its financial resource is not in line with the global economy over the past decade. The United States and other advanced industrial economies are at the message of the crisis. However, the IMF would not have enough resources to provide financial assistance if these countries seek for attend. Therefore, the IMF resources need to be increase or the risk would become worse in the future. 6. 0 Policy Respo nse 6. 0. 1 Term Auction Facility (TAF).The Term Auction Facility is introduced in December 2007 so that banks can borrow from the Fed easily. Thus the banks can bid at a time for funds from the Fed. This is because investors are not willing to lend when afraid about the condition of many financial institutions affected by the crisis. Consequently bank funding markets were put under severe pressure. The main verifiable of the TAF was to reduce the spreads in the money markets and in that way increase the flow of credit and humiliate interest rates. As a result, the TAF helped by encouraging the scattering of liquidity when bank funding markets were under stress.The spread between the London interbank offered rate (Libor) and the overnight indexed barter (OIS) for loans of one-month maturity or longer increased to unmistakably high levels in the late 2007. It is believed that the increase in the Liborâ€OIS spread is caused by the heightened risk perceived by investors at the time. Since Libor affects interest rates on a wide variety of loans and securities (for example, home mortgages and corporate loans), the choppy capitulum in the spread was disruptive to the debt market and negatively affected the economy.The chart 4 and the card below also showed six announcements related to the TAF program. Chart 4: The TAF facility provided term funding through periodic auctions to eligible depository institutions. By providing term funds to banks at regularly scheduled auctions, the TAF may have assured lenders of continued access to future funding and thereby reduced their uncertainty regarding expect funding needs. The TAF was a facility intentional by the Federal Reserve during the crisis to improve liquidity conditions in various asset markets that is crucial to improve short-circuit term funding market. . 0. 2 Economic stimulant drug Act 2008. The Economic Stimulus Act 2008 is a response made by the government through several package totalling over $1 00 billion to individuals and families in the United States. The economic stimulus is designed to boost the U. S economy and prevent further recession. In this programme, the government provide tax rebates to low and middle income taxpayers and tax incentives to stimulate business investment. The procedure of the incentives is that the people will have more money to spend thus increase consumption and the economy.By doing so, the government would expect that it will recover the economy. However it is not as hoped because they spend little although the incentives were given. This can be shown through chart 5. The top line shows individual(prenominal) disposable income increased at the time of rebate. However, the lower line shows consumption did not increase as expected. Chart 5: Increase in income 6. 0. 3 Initial Cuts in Interest Rate. The third policy response to the crisis is sharp reduction in the federal funds rate. When the crisis began in August 2007, the rate was 5. 25% and went down to 2% in April 2008 due to the cut.The lower interest rate then reduced the coat of adjustable rate mortgage that was cause of the crisis. The most significant effect of this response is the depreciation of dollar and rise in oil price. In the early 2008, oil price increased almost twain fold from $70 per barrel in 2007 to over $140 per barrel. High oil price gather the economy as gasoline price increased dramatically and automobile sales plunged. On the other side, the policy reduction in the federal funds rate that cuts interest rate helped raise oil and other commodity prices thus prolonged the crisis. transfer rate also has influence to the rise of oil price.As shown in chart 6, reduction of the federal funds rate at top line in July 2007 drives the oil price at the bottom line upward until July 2008. Chart 6: Cut in interest rate and increase in oil price 7. 0 IMF Response to the Crisis The main role of the IMF is to identify the risks that threaten global econom ic and financial stability and to develop policy responses. The IMF has a worldwide membership and its mandate is to promote economic and financial stability. It is has been provide forum for discussion of international economic issues and help to reach solution on policy responses.In response to the financial crisis, the IMF boosted their lending to developing countries to help them cope with the crisis and to sustain the economic recovery. To meet ever increasing financing needs of countries hit by the global financial crisis and help strengthen global economic and financial stability, the Fund has greatly expanding its lending capacity since the start of the global crisis. It has done so both by obtaining commitments to increase quota subscriptions of member countries and securing large temporary borrowing agreements from member countries, including recent pledges of $456 billion.Countries affected by the crisis can borrow funds from the IMF. Other than that, there is also debate about reforming the IMF. The reclamation issues focus on the need to balance the handed-down functions of providing short-term financial assistance and promoting external balance stability in member countries. To achieve the objective, there is a need for a wider responsibility of crisis prevention, back up financially for countries that, although not suffering actual reserve shortage, are in danger of external shocks and liquidity runs. This measure would prevent more severe impact to member countries as the effect of financial crisis.Since year 2008, the Fund has introduced effective instruments to prevent sudden go in investors’ trust and the eruption of liquidity crises. As a result, borrowers were able to cope with the global crisis, avoiding large scale banking crises and disruptive exchange rate movements and protect social spending. To prevent the crisis, the IMF has lending arrangements signed by the IMF and low and middle-income countries during the crisis. Thes e lending arrangements take part from January 2008 and June 2010. The size of the loan arranged by the IMF is larger for country that is more exposed to the crisis especially for large country.As a result this measure can prevent more severe contagion of the crisis to other countries. 8. 0 Conclusion The U. S. economy has suffered a few study shocks in recent years during the crisis. At the start, these shocks include a large declining in house prices and a spike in the prices of oil and other commodities. The decline in house prices reduced the value of mortgage backed securities. Because of leverage, this threatened the ability of many of financial institutions, including major investment banks. These shocks have combined to put the U. S. conomy and many economies throughout the world into a global financial crisis and a deep recession. It is likely the worse since the commodious Depression in 1930sRegulatory failure is a main responsibility for the crisis. It is shown that weak regulatory in the financial system leaving the consumers inadequately protected. To cope with this crisis, the IMF had contend an effective role. It has come out with a financial assistance by providing loan arrangements to the member countries. 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