Introduction
The problem which the paper discusses is the financial crisis which started in Aug.2008. The problem of financial crisis is a somber phase in the global economy because of which the World is going down at a fast pace. The global financial crisis and the consequent economic recession gave rise to a number of significant and critical questions regarding the sustainability of firms in the Wall Street and have generated enormous panic among the masses.
Problem definition
As given in the article it is the beginning of financial crisis in USA and the crisis has affected the stability of the Wall Street firms. To understand the problem of financial crisis it is necessary to study the economic behavior of markets to make an analysis of how the markets operate and what are the deciding factors of an economy. The word panic simply means to respond with excessive fear or worry to the certain conditions. The people of US are in fear and panic due to the downfall of the economy. The main setback of the economy which led to the situation is the high dependence of financial institutions on borrowed money. In the boom phase of the economy financial institutions started lending to all sectors of the population without considering the ability of the person to pay back the debt. The borrowers could not pay back and this collapsed the financial system in US. This is the beginning of the financial recession. The Real Estate industry floated the creation of extremely soaring risk mortgage requests. The prevalent mortgage defaults led to huge losses in financial organizations. To aggravate the situation deficiencies in capital of banks strained them to withdraw from the market which diminished the value of assets further and resulted in severe losses. Due to the panic, there were a number of rumors like Morgan Stanley being sold to China’s Bank Citic. The Questions addressed show the problem of financial crisis severity.
Since the ’30s, With No End Yet in Sight’ But what’s really happening?
There is no doubt that this period is experiencing the worst financial recession after the Great depression in 1929. The US financial system is presently experiencing its worst tragedy since the huge gloominess. The entire failure of the banks in the US economy might be arrived at as huge as one-third of the whole bank assets. So the financial crisis in the US economy has lead to the decrease in lending (in banks) which is one of the reasons which led to a severe decline in the US nation. The fall in the prices of shares and the fear of lending created market discrepancies in the economy. These were one of the primary causes due to which centuries-old Wall Street firms like Merrill Lynch and Bear Stearns had to sell themselves. Similarly, Lehman Brothers filed for insolvency because it failed to find a prospective buyer. One of the major causes which adversely affect the US market is the decrease in the rate of earnings in the entire US market. A decrease in the rate of earnings was the major reason for the high joblessness rate and high price rise. Declined earnings lead to a decrease in the business assets. Another reason that led to a crisis in the US economy was the failure of strategies to re-establish the rate of earnings and look for fresh borrowers etc. The financial crisis in the US economy affects the entire working conditions of the state. Unemployment rates in the US and European countries are on a high due to the financial crisis until 2011. “The US economy is expected to grow slowly, with a 2.5 percent growth rate next year and 2.8 percent growth rate the following year, while the Euro region’s recovery is likely to remain even slower than the US, with a 0.9 percent growth next year and 1.7 percent in 2011” (Greg 2009). People in the US are in fear of losing their jobs due to the instability in the market. Market downfall has made gold an even more precious item with the price of gold increasing on a day-to-day basis. There seems to be no solution to the problem of financial crisis at hand and people are anticipating the worst.
Is this the beginning of the end?
The entire financial decline has led to a decrease in the economic development of the nations. People are in a fear of losing their jobs and they are beginning to consider this as the end of all. With a shortage of income in their hands and the fear of losing their share prices, there is mental tension among the people and in such a predicament people do not know how to react. The financial crisis is one of the major factors which affects the sustainability of the firms in the global marketplace. It is very difficult to decide whether the present economy is really seeing the starting of the turn-round or still experiencing the fall down. Expectations are fast evaporating for a quick end to the financial crisis but history has shown that the formulation and practice of some significant policies have helped the economy to recover from the great depression phase.
Or is it just a painful, but normal cycle correcting the excesses of recent years?
Yes, it is painful but it is a normal cycle correcting the excesses of recent years. The important reason for financial crises like the previous great depression and the current financial turmoil is uncontrolled capitalism. The capitalists did wild speculation in the real estate market and invested too much in productive capacity which created a fizz that threatened the continued existence of firms and thus crisis erupted. The uncontrolled speculation of economic growth creates an end product called, financial crisis. “Today, for example, after years of out-of-control lending and an unsustainable housing industry bubble, a crisis corrects those excesses by wiping out billions in debts, collapsing home prices, and so on” (Wolff 2009). Economists predict that this is a normal phase when the economy turns capitalist. Whenever financial depression occurred the common man was the greatest sufferer. The painful episode of unemployment, underemployment, pay cuts, rise in prices of basic commodities, fear of losing jobs creates a mental trauma for the common man. In the US there has been a rise in suicidal tendencies among people due to the present economic depression.
Does responsibility lie with the rating agencies, which have been overvaluing financial institutions for a long time?
Yes, responsibility to the problem of financial crisis lays with the rating agencies because credit rating is a vital component of the financial structure. Therefore the ratings announced in the economic market should be trustworthy, lucid, and impartial so that investors have accurate and adequate knowledge of the economic market. The overvaluations created a wrong impression in the market of the value of stocks. Regular audits should be conducted for credit rating agencies. Various Responsibilities lay with the rating agencies, which had been overvaluing financial institutions for a long time which will help to overcome the problems to a certain extent. “The deepening and spread of the U.S. financial crisis and the government’s late move to step in to offer regulatory oversight and bailouts might reasonably have been expected to generate a round of, “I told you so’s” from Europe. After all, crises in the American economy have enormous ripple effects around the world” (Joyner 2008). Rating agencies can use a risk form where a provision for the decline in stock and home prices should be made in order to avoid overvaluation of the prices of these products.
Did dubious short sellers manipulate stock prices after all, they were suspected of having caused the last stock market crisis in July?
It is not certain whether short-sellers are a cause of the problem of the financial crisis. Manipulations occur in the financial markets and this is one of the reasons for the financial recession. While the CEOs of companies blame the short sellers for bringing down the price of shares in the market the short-sellers reverse the blame to the Federal Reserve which had lowered the rates. Under some circumstances, short-sellers can manipulate the price of stocks through their intensive acts of speculation. They can also influence investors by creating a chain reaction which can be called a feedback ring in which they pull back the credit of the firm and reduce its share prices.
Situations in the Arab world
The global economic crisis has also affected the economy of the Arab World. While countries like Saudi Arabia, Oman, UAE, Bahrain have been highly affected, countries like Libya, Syria and Qatar were less influenced. When the financial recession actually started in the US the oil prices were high but as it started spreading the oil prices tumbled in the stock markets and this resulted in a severe problem in the Arab economy. Moreover in the Arab world especially Dubai in UAE, the economy was highly dependent on the real estate market. So when the real estate market crashed in the US the Dubai economy also experienced severe problems. There was a rise in unemployment, price rise and wage cuts which generates panic among the common man.
Conclusion
It was found that the problem of the financial crisis had many major causes. Some financial products introduced in the market were of excessive risk and were not linked to the income of the borrowers. These financial instruments when introduced in the market should have been handled by efficient people who had the knowledge of economic policies. If market ethics were followed correctly then the situation would not have become such adverse.
Reference
Greg., 2009. How dumb do you have to be to believe that the economy is improving?. [Online] Yahoo Answers. Web.
Joyner, J., 2008. Financial crisis: View from Europe. [Online] Atlantic Council. Web.
Wolff, R., 2009. Capitalism in crisis, government important. Monthly Review. [Online] MR ZINE. Web.