The global financial crisis of 2008-2009
The global financial crisis of 2008-2009 likely altered popular wisdom in a variety of ways. Many people saw financial markets as a secure place to invest their hard-earned money. Furthermore, the availability of financial instruments has grown throughout time, providing investors with the chance to diversify their portfolios in the goal of reaping favorable results. Financial firms were seen to be 'too big to fail' by the people. Prior to the 2008-2009 financial crisis, there was a lot of trust in financial markets. People lost billions of dollars in investments as a result of the unexpected. Some banks such as Lehman Brothers collapsed, and others such as Goldman Sachs had to be bailed out by the government to prevent insolvency. This prompted a revision of some financial theories and changes in regulation to keep up with the changes in the dynamic global financial markets (Berlatsky, 2010).
Reliable Predictors of Economic and Financial Crisis
Loss of jobs is a good indicator of a declining economy. Basically, economic growth is fueled by the high purchasing power of people, who are gainfully employed. When companies start retrenching to cut on costs, it shows that the level of economic activity in the economy is low (Chen, 2015). Retrenchment leads to income losses to the victims, which further lower the purchasing power in the economy. In the U.S, in the last months, the level of unemployment grew significantly that had led to the financial crisis. Similar trends have been observed before, when other markets collapsed.
A rise in credit default rate is another indicator that the economy is about to crash. When individuals and corporations become unable to meet their loan obligations, it shows that the economy is declining. Before the global financial crisis, there was a steady increase of default rates for mortgages, which led to depletion of the value of bank assets. This has resulted in a decline in value of the underlying derivatives that orchestrated the crisis (Chen, 2015). Low consumer spending is also an indicator of a looming financial crisis (Arup, 2010). When consumer spending declines, it means that the level of income in the economy is on the downfall. This ultimately leads to depressed economic activity in the economy and recession.
Achievements and Pending Issues Related to Global Financial Crisis
The global financial reform program spearheaded by G20 began in 2008. One major step that has been taken is the introduction of BASEL III framework (Taylor & Clarida, 2014). The main driver for this was the need to strengthen the regulation of banks and make them safer. Although it has not achieved full implementation, it has significantly made banks more secure. For instance, the BASEL III framework has increased the capital ratio of Tier 1 capital consisting of common equity from 2% to 4.5% of the total risk-weighted assets. It has also strengthened other aspects such as the liquidity ratios, leverage ratios, corporate governance, and risk management. The pending issue that stands out in BASEL III has been the slow implementation in different parts of the world due to the complexity of existing regulations in different jurisdictions.
The G20 also came up with better regulation of credit default swaps and other derivatives. After the global financial crisis, these financial instruments were found to be very risky and needed close monitoring. Several rules were brought forward to regulate the trading of these financial products. This includes standardization of such trades by using standard derivative products (Taylor & Clarida, 2014). Furthermore, all such trades should be conducted through an exchange platform to increase transparency and accountability. Trades involving derivatives are also required to have a higher capital margin. The pending issue with the regulation of derivatives is the reforms are yet to be fully implemented. Derivatives are numerous, and by their nature, they are complex, which makes it hard to standardize them.
Another pending issue is that the G20 is yet to implement standardized international accounting and financial reporting standards (Chen, 2015). Different jurisdictions use different sets of standards. This fact makes it more difficult to regulate the financial sector. Inadequate regulation played a big role in the 2008-2009 global financial crisis.
The Threat of an Impending Financial Crisis
Credible international financial organizations such as the International Monetary Fund (IMF) have warned of an impending financial crisis. There have been strong indicators that have hinted the risk of a looming global financial crisis. Some of the indicators include recession and instability of emerging economies that are currently being witnessed. Recession coupled with high levels of debt and high interest rates is a recipe for disaster. The slowdown in China has negatively affected trading activity globally. The levels of debt in developed and developing countries has been on the rise. There have been fears of disharmony in Europe, as evidenced by some recent events in Europe such as the vote for Brexit. All these are pointers to a looming global financial crisis (Chen, 2015).
Conclusion
The global financial crisis came as a shock to many and challenged many financial theorists to rethink their methods (Scott, 2010). It was a big blow to the global financial markets, as the confidence that people had in financial institutions was severely eroded. The effect is that people have now become more cautious and less trusting with their money. The G20 has come up with global financial reforms to mitigate the possibility of another global financial crisis.
References
Arup, C. (2010). The Global Financial Crisis: Learning from Regulatory and Governance Studies. Law & Policy, 32(3), 363-381. http://dx.doi.org/10.1111/j.1467-9930.2010.00322.x
Berlatsky, N. (2010). The global financial crisis. Detroit, Mich.: Greenhaven Press.
Chen, Q. (2015). Financial Crisis. Washington, United States: International Monetary Fund.
Scott, H. (2010). Global financial crisis. Hauppauge, N.Y.: Nova Science Publishers.
Taylor, M., & Clarida, R. (2014).The Global Financial Crisis. Hoboken: Taylor and Francis.
