Ocaya (2012) state that the credit crisis is a financial market or economic meltdown of borrowing the funds to the borrower and cannot get back, it evaluated by severe shortage of money or credit bring accumulation of bad debts, defaults and falling financial institutions among others. However, the experts and economists are unclear as what form a credit crisis. The Wall Street defines a credit crisis as a “period during which borrowed funds are difficult to get and, even if funds can find, interest rates are very high”. Credit crisis mostly began in 2007. The effect of the credit crisis has brought fall down on the housing market in some country resulting in foreclosures and unemployment.
By examining the nation’s economic struggles during this time period (2007-2009), it will conclude that the current macroeconomic situation deals with unemployment, which is a direct result of the recession. It can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). The bubble forced banks to give out homes loans with unreasonably high risk rates.
The credit crisis is referred to as economic downturn by credit squeeze, provision of doubtful debt and bankruptcies among others. (IMF, 1998) Credit crisis is known as a credit crunch, it is an extension of recession. According to the Ocaya (2012), Credit crisis is a sudden shortage of loan and tightened the requirement of economy and society needs of getting loan from financial institutions. In such situation, lender started keeps the cash and stop lending money because they are worry about a large of debtor bankrupt and mortgage defaults. Lender had adjusted the interest rate of borrowing to unaffordable rate.
This causes poverty to increase and decrease the welfare in the economy. The financing of fiscal deficit generates harsh problem for poverty decrease. In most of the developing countries, fiscal deficit is financed through borrowing. The internal borrowing affects the interest rate in the long run. While external borrowing causes account deficit which decreases the net export of the country.
2.6 – Sovereign Debt Management - Impact of the global financial crisis: The world faced unprecedented global financial crisis (GFC) which started in 2007-08 and all the macroeconomic policies including monetary policy and SDM were impacted by resultant turbulence. As economic growth slumped and recession had set in, financial markets had turned volatile with global risks increasing significantly. Due to bailouts by the governments and monetary policy measures by the Central Banks, the debt shifted from the balance sheets of distressed banks to the central banks and governments. The governments and central banks in advanced economies acted in unison to counter the effects of the crisis and stimulate a quick economic recovery. Central banks
Notably, when a financial crisis emerges, the liquidity rate for money reduces to a level where saving cannot help in salvaging the already worsened money situation. For instance, one of the most prevalent financial crises took place in 2008 when the global money market went through a massive recession period thus creating a huge economic fuss across the globe. In any situation of financial crisis, companies and businesses are often faced by the problem of ethical dilemma on how to react to the financial crisis at hand. These ethical dilemmas are brought about by the fact that the business might have several options on reacting to the situation that is responsible for the financial crisis. Basically, this research paper aims at exploring the threats that most users of financial information have gone through in divergent parts of the world over the recent past.
Frederic Mishkin makes the point in the text, The Economics of Money Banking, and Financial Markets (2010) that “Banks and other financial institutions are what make financial markets work. Without them, financial markets would not be able to move funds from people who save to people who have productive investment opportunities.” (p.7). The movement of funds between savers and those with productive investment opportunities is the means of creating growth. When people lose confidence in the economy this activity freezes or weakens, consequently, asset prices decline, unemployment rises and companies default as was the case of Lehman Brothers in 2008. The freezing of the flow of money is a financial crisis.
Macroeconomic situation in U.S Current economic situation in U.S is demanding, current macroeconomic situation has been termed the worst and unstable. Different researchers and analysts have proved beyond any doubt that due to slow economic activities growth of the economy is always hampered with clear indications from corporate profits, GDP and employment falling, and inflation rising slightly higher. Countries that have recently fallen into economic recession employ monetary and fiscal policies by increasing money supply into the system through loosening of monetary policies. Reducing taxation while increasing government spending is also a concrete solution used in curbing macroeconomic crisis (Mian et al, 2014). One of the goals stipulated by the Federal Reserve in their labor laws is to maximize employment.
The United States is currently experiencing the biggest financial crisis after the Great Depression, in this paper we will discuss what caused the current economic crisis and why? Two What is the relationship between mortgages, the housing crisis and Wall Street? Third, how has this crisis affected fiscal policy and what are some of the drawbacks of government intervention. Four, what is the recession doing to GDP, economic growth and inflation and how are other countries faring. Five, discuss the different types of unemployment and why is underemployment becoming an economic issue and lastly, what should be done to get the economy back into expansion mode.
The History According to Arnold (2009, p.803-809), subprime mortgage defaults in the United States was the first problem in this current financial crisis, then bubbled damaging cris... ... middle of paper ... ...tion. Firstly, the Fair Value Accounting is not always accurate in the financial market because the value of assets and liabilities always fluctuated. Sometimes, the asset value is overestimate and underestimates. Secondly, the Fair Value Accounting makes financial institution reduce their ability to face the risk because in this current economic situation the value assets are fluctuated. It is a problem to managers to sell or buy the assets.