The most recent financial crisis began in the United States in the fall of 2007.
ID: 1109178 • Letter: T
Question
The most recent financial crisis began in the United States in the fall of 2007. The first visible stage was called the subprime crisis in reference to housing loans made in the United States that were given to borrowers with less than prime credit ratings. When home prices started falling, refinancing became difficult or impossible for homeowners who now owed more than their houses were worth. Problems in the housing sector quickly spread through the banking sector and into other parts of the financial services industry such as insurance companies and investment banks that had bought mortgage- backed assets.
By early 2008, the subprime crisis had spread beyond the United States. In the United States, home prices rose nearly 90 percent between 2000 and 2006, and the United Kingdom, Spain, and a number of other markets experienced increases as large or larger. These increases fed on themselves as they pulled more finance into the housing market.
Three critical factors or preconditions turned a national, U. S. problem into a global one. First, the world’s financial markets had undergone a relatively steady transformation over several decades with the development of new and innovative financial products. Second, financial markets had become much more integrated. The growing international integration of financial services meant that capital for home loans could be moved from one country to another, and that the United States, Spain, Ireland and other locations where there were rapid increases in home prices could continue to borrow to purchase even more homes. Third, a spirit of deregulation had captured the thinking of many economists, politicians, and regulators. This permitted new forms of very risky finance to develop without close supervision, and without consideration for the fact that some of the new forms of finance posed risks not only for the individual financial institutions using them, but to the entire economic system as well. Questions: According to the interview...
a) How were U.S. commercial banks able to survive the 2007 financial crisis?
b) What was the response in China? (i.e., was China affected? If so, how?)
c) What was the response in Japan? (i.e., was Japan affected? If so, how?
d) What was the response in the rest of Asia such as Korea? (i.e., was Korea affected? If so, how?
e) What is the future outlook for the U.S. economy?
please answer this!!
Explanation / Answer
A) the US commercial bank was able to survive the 2007 financial crisis because of the tremendous efforts from the side of the US government.
after the financial crisis, the US Congress passes the Emergency economic financial act which was administered by the US fed to stop and control the further mess in the banking system and in the economy.
the troubled financial institutions were injected with billions of dollars of treasury administered credit in exchange for preferred stocks and common equity stakes.a sequence of the bailout by the fed was carried out.
As a part of credit easing, there was the tremendous purchase of mortgage-backed securities and treasury bill. There were continuous efforts from the FED to raise the money supply and lower the interest rate to again boost the banking system and the economy.
B) China was also hit hard by the 2007 financial crisis, we know that Chinese economy is heavily dependent on the global trade and investment flow .and the US is a major contributor in the FDI inflow in China .therefore this slowdown in the us economy has also affected the Chinese economy.during the crisis Chinese industries especially the export sector was highly affected that has caused huge unemployment in China during the crisis period so that Chinese government has to issue bailout of about 586 billion dollars to stimulate the domestic economy .
C) though there was some effect of the financial crisis on Japan but it was not too big because it is said that risk management practices of Japan were highly responsible for their less exposure to the global financial meltdwn.ther is another view that Japanese banks were mainly concentrating on improving financial soundness rather than on improving profitability unlike the American commercial banks.
japanese banking system during the time of crisis was sound so the stress that was caused due to American financial meltdown was minor and was caused only due to external factor so government response to counter the crisis effect were short-term and some corrective action like-
the Japanese government took steps to ensure the soundness of the financial system, like conducting stress test with financial organisations on the regular basis, try to identify the potential spillover that may cause the failure of the banks like AIG and Lehman brother etc.
D) Korea was also one of the worst affected economies during the 2007 financial crisis.in the beginning, it was looking that Korea was in much better condition because of its substantial cushion of official reserve a good financial framework and it's less exposure to the toxic asset originating from the western bank.
however, given its external trade volume and its integration with the rest of the financial system once the crisis started the confidence of the investors deteriorated and they started their fund out of the Korean economy.
some of the action taken by the Korean government counter the crisis are-
the Korean central bank arranged a 30 billion dollar swap arrangement with the US fed to strengthen its defence against global liquidity another
step was that the Korean central bank resort to aggressive interest cut to eliminate the credit crunch.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.