GLOBAL FINANCIAL CRISIS

-AVANI SHAH PGDMRBA-019

INTRODUCTION:
Between mid-2007 and early-2009, the global financial crisis (GFC) was a period of
unprecedented stress in global financial markets and banking systems. During the Global
Financial Crisis, a slump in the US housing market served as a spark for a financial crisis that
expanded from the US to the rest of the globe via global financial system links. Many banks
around the world suffered significant losses and needed government assistance to stay afloat. As
the main industrialized economies endured their biggest recessions since the Great Depression in
the 1930s, millions of people lost their employment. Recovery after the financial crisis was also
significantly slower than it had been in previous recessions that had not been accompanied by a
financial crisis.

MAIN CAUSES OF GLOBAL FINANCIAL CRISIS

A variety of reasons explain the GFC and its severity, as they do other financial crises, and
people are currently discussing the relative relevance of each factor. The following are some of
the most important aspects:

EXCESSIVE RISK-TAKING IN A
FAVOURABLE MACROECONOMIC
ENVIRONMENT

INCREASED BORROWING BY BANKS

AND INVESTORS

REGULATION AND POLICY ERRORS

 EXCESSIVE RISK-TAKING IN A FAVOURABLE
MACROECONOMIC ENVIRONMENT:

Economic circumstances in the United States and other countries were favorable in the
years leading up to the Great Recession. Economic growth was strong and consistent, with
low rates of inflation, unemployment, and interest. House prices skyrocketed in this setting.

Expectations that house prices would continue to grow drove households, particularly in
the United States, to borrow excessively to buy and construct homes. Property developers
and households in European countries (such as Iceland, Ireland, Spain, and other Eastern
European countries) borrowed excessively due to similar expectations about house prices.
Many of the mortgage loans were for amounts near to (or even exceeding) the purchase
price of a home, particularly in the United States. Investors seeking short-term returns by
'flipping' houses and ‘subprime' borrowers accounted for a big portion of such hazardous
borrowing.

Individual lenders competed to issue ever-larger amounts of housing loans, which appeared
to be quite profitable at the time due to the favorable economic climate.
Many lenders who provided housing loans did not thoroughly analyses clients' ability to
repay their debts. This represented the widely held belief that favorable conditions will
persist. Lenders also had little incentive to be cautious in their loan decisions because they
did not expect to lose money. Instead, they sold massive quantities of loans to investors,
typically in the form of ‘mortgage-backed securities,' which were made up of thousands of
individual mortgage loans of variable quality. MBS products became more sophisticated and
opaque over time, yet they were still recognized as extremely safe by external agencies.

MBS investors made the error of thinking they were purchasing a very low-risk asset: even if
some of the mortgage loans in the package were not repaid, it was anticipated that the
majority of the loans would be repaid. Large US banks, as well as foreign banks from Europe
and other nations, were among the investors looking for larger returns than could be found in
their own markets.

 INCREASED BORROWING BY BANKS AND INVESTORS

Banks and other investors in the United States and abroad borrowed increasing amounts in
the run-up to the GFC to expand their lending and purchase MBS products. Borrowing
money to buy an asset (also known as increasing leverage) increases possible earnings while
also increasing potential losses. As a result, when home prices began to collapse, banks and
investors suffered significant losses as a result of their excessive borrowing.
 Furthermore, banks and certain investors have been progressively borrowing money for very
short periods of time, even overnight, to purchase assets that could not be sold rapidly. As a
result, they grew more reliant on lenders, including other banks, to extend new loans as
current short-term loans were paid off.

 REGULATION AND POLICY ERRORS

Subprime loans and MBS products were regulated too loosely. In particular, the institutions
that manufactured and sold the complicated and opaque MBS to investors were not
adequately regulated. Not only were many individual borrowers given loans that they were
unlikely to repay, but fraud – such as overstating a borrower's income and over-promising
investors on the safety of the MBS products they were being sold – was becoming more
widespread.
Furthermore, as the crisis progressed, many central banks and governments failed to
recognize the extent to which faulty loans had been extended during the boom, as well as the
numerous ways in which mortgage losses were spreading throughout the financial system.

EFFECTS OF FINANCIAL CRISIS:

Drop In Housing Prices

Loss Of Livlihoods

Unsafe India

Decrease In
India's
Gdp

 Housing prices have dropped by more than 31.8 percent. Despite the fact that the US
economy emerged from recession after two years, the effects were still felt.
Unemployment reached an all-time high and remained above 9% for more than two
years.
  Money, homes, and livelihoods were all gone for a large portion of the people. The
majority of them even lost their retirement funds. In a nutshell, this crisis
outperformed the Great Depression.

 India was less reliant on the US economy at the time, and so less vulnerable to its
negative aspects. However, it was not fully safe from the massive bomb that blew up
the whole US financial market.

 In 2008, India's GDP decreased from 9 percent to 7.8 percent. Approximately $12
billion in funds withdrew from the stock markets, resulting in a significant drop.
Furthermore, the trade and budgetary deficits were severely harmed. The Indian
government, on the other hand, was quick to respond to the issue.

HOW THE GREAT FINANCIAL CRISIS CAME OUT?

 US HOUSE PRICES FELL, BORROWERS MISSED REPAYMENTS
Falling US housing values and an increasing number of borrowers unable to service their
loans were the drivers for the Great Recession. House prices in the United States peaked in
mid-2006, coinciding with a surge in the supply of newly constructed homes in some
locations. As home prices began to decrease, the percentage of borrowers who defaulted on
their loans increased. Because the share of US households (including owner-occupiers and
investors) with huge loans had risen dramatically during the boom and was larger than in
other countries, loan repayments were particularly sensitive to housing prices in the US.

 STRESSES IN THE FINANCIAL SYSTEM

Around the middle of 2007, the financial system began to show signs of stress. Because
many of the residences confiscated after borrowers missed payments could only be sold at
prices below the loan level, some lenders and investors began to suffer significant losses. As
a result, investors became less willing to buy MBS and actively sought to sell their holdings.
As a result, MBS prices fell, lowering the value of MBS and, as a result, MBS investors' net
worth. As a result, investors who bought MBS with short-term loans found it much more
difficult to refinance, thereby exacerbating MBS selling and price falls.

 SPILLOVERS TO OTHER COUNTRIES

Foreign banks were active participants in the US housing market throughout the boom,
including purchasing MBS, as previously mentioned (with short-term US dollar funding).
Banks from the United States also had significant operations in other nations. The issues in
 the US housing market were able to spread to other countries' financial systems and
economies thanks to these interconnections.

 FAILURE OF FINANCIAL FIRMS, PANIC IN FINANCIAL

MARKETS

Following the fall of the US financial giant Lehman Brothers in September 2008, financial
tensions reached an all-time high. This, together with the bankruptcy or near-failure of a
number of other financial organizations around the same time, sparked a global panic in
financial markets. Investors began withdrawing cash from banks and investment funds all
throughout the world, unsure of who would be the next to fail or how exposed each
institution was to subprime and other distressed loans. As a result, financial markets
became dysfunctional as everyone attempted to sell at the same moment, and many
organizations seeking new funding were unable to do so.

TIMELINE:

August March September

2007 2008 2008

 AUGUST 2007: THE DOMINOES START TO FALL:

By August 2007, it was clear that the financial markets couldn't fix the subprime crisis, and
that the problems were spreading far beyond the United States. Fear of the unknown caused
the interbank market, which keeps money moving around the world, to completely freeze.
Due to a liquidity difficulty, Northern Rock had to seek emergency funding from the Bank of
England. UBS, a Swiss bank, was the first big bank to declare losses on subprime-related
 assets, totaling $3.4 billion, in October 2007. The Federal Reserve and other central banks
will take concerted action in the coming months to lend billions of dollars in loans to global
credit markets, which have come to a halt as asset prices have fallen. Meanwhile, banking
institutions battled to evaluate the trillions of dollars in now-toxic mortgage-backed securities
that sat on their balance sheets.

 MARCH 2008: THE DEMISE OF BEAR STEARNS:

By the winter of 2008, the US economy had entered a full-fledged recession, and stock
markets throughout the world had plummeted to their lowest levels since the September 11
terrorist attacks, as banking institutions' liquidity problems persisted. As part of its effort to
slow the economy, the Fed cut its benchmark rate by three-quarters of a percentage point in
January 2008, the largest cut in a quarter-century. The awful news kept coming in from all
directions. Northern Rock was forced to be nationalized by the British government in
February. Bear Stearns, a Wall Street institution that dates back to 1923, collapsed in March
and was bought for pennies on the dollar by JPMorgan Chase.

 SEPTEMBER 2008: THE FALL OF LEHMAN BROTHERS:

The mayhem had extended across the financial industry by the summer of 2008. IndyMac
Bank became one of the largest banks in the United States to collapse, and the government
seized the country's two largest mortgage lenders, Fannie Mae and Freddie Mac.
Nonetheless, the collapse of the legendary Wall Street bank Lehman Brothers in September
was the greatest bankruptcy in US history, and for many, it served as a symbol of the global
financial crisis' destruction. Financial markets were in free decline at the time, with the major
US indices experiencing some of their largest losses on record. The Federal Reserve, the
Treasury Department, the White House, and Congress all scrambled to come up with a
coherent plan to stem the bleeding and restore economic confidence.

WHICH BANKS FAILED IN 2008?

 Without first stating this, the total number of bank failures due to the financial crisis cannot
be revealed: no depositor in an American bank lost a dime as a result of a bank failure.

 According to the Federal Reserve of Cleveland, more than 500 banks collapsed between
2008 and 2015, compared to only 25 in the previous seven years.

 The majority were small regional banks that were all bought, along with their depositors'
accounts, by other banks.

 The biggest failures were not banks in the traditional Main Street sense but investment banks
that catered to institutional investors. These notably included Lehman Brothers and Bear
Stearns. Lehman Brothers was denied a government bailout and shut its doors. JPMorgan
Chase bought the ruins of Bear Stearns on the cheap.
 As for the biggest of the big banks, including JPMorgan Chase, Goldman Sachs, Bank of
American, and Morgan Stanley, all were, famously, "too big to fail." They took the bailout
money, repaid it to the government, and emerged bigger than ever after the recession.

WHO MADE MONEY IN THE 2008 FINANCIAL CRISIS?

Several smart investors profited from the crisis, largely by salvaging bits from the wreckage.

 Warren Buffett made billions of dollars in corporations like Goldman Sachs and General
Electric for a variety of reasons, including patriotism and profit.

 When the housing market collapsed, hedge fund manager John Paulson made a lot of money
betting against it, and then made even more money speculating on its rebound when it
touched bottom.

 Carl Icahn, an investor, demonstrated his market-timing abilities by selling and buying casino
assets before, during, and after the financial crisis.

Warren John Carl

Buffett Paulson Ichahn
IMPACT OF GLOBAL FINANCIAL CRISIS ON FOOD AND
AGRICULTURAL SECTOR:
The effects of the global economic slowdown are becoming more widespread. However,
people employed in export-oriented sectors such as diamond polishing, textiles, carpets, and
hosiery appear to have the most impact on India's lowest income categories. There has been
little or no influence in industries such as roti (food), kapda (clothing), aur (and) makaan
(shelter) that cater to the lower end of domestic demand. The good news is that, despite the
slump, grain demand remained strong. The food and agriculture sector does not appear to be
in danger of losing jobs. while demand in the lower end of the clothes and textile sector
Although the market remains healthy, it is not as up-market as it once was. The same contrast
exists — stable demand and full employment. There is a decline at the lower end and a rise at
the higher end – this can be noticed.In the makaan, or construction materials and
methods sector. Beyond roti, kapda, and makaan, the non-farm sector The export-oriented
handmade sector is the one that has been hit the worst. Tourism, retail, and the carpet
business are all examples of this.

Food and Agriculture Sector:

Let's take a peek at the roti, or food and agriculture industry. The good news is that, despite
the slump, grain demand remained strong. While the Indian population's income elasticity of
demand for grains is dropping and may already be near zero, low-income groups still have
positive income elasticity of demand for cereals. As a result, even if average salaries fall
slightly, demand for cereals will not reduce as people turn to more fundamental diets. This
assures that the demand for farm produce stays robust, as well as the demand for agricultural
labour.

While 80 percent of Indian farmers are small or marginal farmers who produce little or no
marketable surplus and employ little labor outside the family, the 20% of middle and large
farmers who produce 80 percent of the marketable surplus of wheat and rice all require and
employ labour. According to reports from the field in Punjab and Haryana, demand for
labour much outnumbers supply in many regions, and labourers are negotiating wages in
terms of per-acre work contracts rather than daily rates. The shortage of agricultural labour is
partly attributable to labourers staying at home due to increasing work opportunities in their
areas as a result of the National Rural Employment Guarantee Scheme.

However, the 10% increase in grain wholesale prices from December 2007 to December
2008, as well as the likelihood of much bigger increases in retail prices, is cause for alarm.
Wheat and rice continue to be the most important sources of calories in most Indian
consumers' diets, accounting for over 22% of household expenditure in rural regions and
13% in urban areas – more than any other item. All urban households, as well as a significant
 portion of the rural population, landless households, and small and marginal farmers, are net
cereal consumers.

As a result, a rise in the price of these basic foods results in a decrease in actual income.
Politicians of all stripes have picked up on this, which is why one party after another is
offering rice or wheat for Rs. 2 or Rs. 3 a kg to low-income families.

The same may be said about pulses, which are a staple protein for the impoverished. To help
enhance domestic supply and keep prices in check, the Indian government has extended the
zero-duty import of pulses for another year while also extending the export ban on all pulses
except chickpeas (or kabuli chana) until March 2010. Finally, India continues to import
considerable quantities of edible oils (5.60 million tonnes in 2007-08), and the government
has decreased import levies to keep domestic edible oil prices low.

The food and agriculture sector does not appear to be in danger of losing jobs. There are also
no substantial press stories about employment losses in these industries. Whether the
numbers are due to domestic output being exported or imports, the occupations involved in
the production, procurement, transportation, storage, processing, and retailing of grains,
oilseeds, and pulses remain substantially unchanged. Surprisingly, even the segment catering
to higher income groups and exports has remained strong in the food and agriculture sector.
Over a thousand cashew processing units, for example, are unaffected and continue to grow
in the Palasa area of the Srikakulam district of AP. This is largely due to the fact that the
Indian food processing industry exports items with consistent demand, such as basmati rice,
pulses, herbs, ready-to-eat products, pickles, chutney, gravies, chicken, meat, fruits, and
vegetables. These items are being shipped all over the world, including Europe, the United
States, the Middle East, and Southeast Asia. The demand is high.

CONCLUSION:
In the financial world, bubbles happen all the time. A stock's or any other commodity's price
might become inflated above its true value. Typically, the losses are restricted to a few too
exuberant buyers.

The 2007-2008 financial crisis was a new kind of bubble. Bubble got large enough, like only a
few others in history, that when it burst, it harmed entire economies and harmed millions of
people, including many who weren't trading in mortgage-backed securities.

SOURCES:

https://blog.finology.in/economy/financial-crisis-2008
file:///C:/Users/Welcome/Documents/Downloads/impact_of_the_financial_crisis_on_the_poor_i
n_india_some_initial_perspectives.pdf

https://www.rba.gov.au/education/resources/explainers/the-global-financial-crisis.html