The Global Financial Crisis Flashcards
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In the early to thousands the world was experiencing a prolonged economic boom with low inflation and steady economic growth interest rates were at historically low levels
Cheap loans encouraged consumer debt in particular mortgage debt
Continued economic growth led to rising real incomes and greater demand for mortgages but the boom also lead to house price inflation which meant higher levels of borrowing in order to finance mortgages
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deregulation of financial services allowed more lenders into the marketplace which encourage competition and the development of increasingly creative financial products to entice customers
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In the USA sub-prime mortgage is loans to people with poor credit history is became increasingly common often with no proof of earnings required
In 2006 the US suffered a nationwide house price slump
Large numbers of American mortgagees were unable to make the payments on the loans but when the houses were sold the sums recovered were not enough to repay the debt
Banks found that they were owed much more than the sums in customers savings
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As a result northern rock are UK mortgage lender had to be rescued in the autumn of 2007 Lehman Bros a major US bank and a IG and American insurance giant collapsed in September 2008
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The crisis might have been contained many European banks had steaks in US banks or had taken on some of the debt in the form of securities
The contagion then spread resulting in state governments bailing out financial institutions which lead to high levels of annual budget deficits and structural debt across Europe
Problems with sub-prime mortgage is in the USA triggered a financial crisis that soon impacted on other economies
Exacerbated by risky banking practices in the UK Britain’s economy slipped into recession in 2009
The global financial crisis was the worst since the great depression of the 1930s
CASE STUDY: the IMF and the global financial crisis
Some argue that the IMF should take some of the blame for the crisis because it encouraged the deregulation of International finance by promoting neoliberal orthodoxy through the conditions on its loans its technical advice and annual reports on the financial health of member states
It was slow to recognise the signs of the global financial crisis and to take affirmative action
CASE STUDY: the IMF and the global financial crisis
It did not anticipate that in a deregulated environment financial markets would engage in casino capitalism — risky practices such as parcelling debt out to other financial institutions under the guise of high yielding securities
CASE STUDY: the IMF and the global financial crisis
Before the global financial crisis the IMF was in danger of becoming irrelevant its currency exchange role had lapsed after the end of Breton Woods its lending capacity was declining its staff was shrinking and few countries paid attention to its surveillance reports
CASE STUDY: the IMF and the global financial crisis
However the IMF has played a prominent role in economic recovery brokering rescue packages for Pakistan Iceland Hungary and Ukraine and providing $700 billion of crisis lending to member states
It has taken the leading role in developing and helping to finance a European wide bailout fund providing $430 billion in extra lending capacity For a $1 trillion European rescue fund
It has urged to greater fiscal integration between Eurozone members to help stabilise the southern European economies
It has also been outspoken in suggesting direct lending to European banks rather than state governments and in calls for the major recapitalisation of banks so that they have large enough deposits to withstand mass defaults on loans
The IMF has also strengthened its surveillance and risk analysis so that it can give early warning is of trends that might lead to future financial difficulties
CASE STUDY: the IMF and the global financial crisis
While it can be argued that the IMF contributed to the global financial crisis it can also be argued that it has been taking steps to promote recovery following the crisis and prevent future crises
