GLOBAL FINANCIAL CRISIS
The global economic meltdown had been predicted to take place in the year 2007 by European economists. However, the economic boom was sustained until the beginning of year 2008 when the boom came to an abrupt end with the failure of several banking institutions. The plot began with the bust of the property boom.
Due to loose regulations to obtain mortgage loans, there was increasing demand for houses and Americans were on the course to realise the dream of ‘one family one home’. The surging demand was followed by the increase in property prices up to an irrational level. However, the property boom stopped at the beginning of year 2008 and suddenly house prices fell to a dangerously low level. Shortly after, borrowers began to default their loans as they could not continue their initial installments.
Consequently, banks which were excessively exposed to such borrowers were forced to write off a huge amount of bad debts resulting in massive losses. Soon enough, numerous financial institutions were faced with serious credit crunch and even big names such as New Century Finance, American Home Mortgage and the 158 year old Lehman Brothers succumbed to bankruptcy which caused a major shock to economies worldwide.
The failure of more than 30 banking institutions resulted in a bad economic situation. Business operators were facing financial constraints as it was difficult to obtain loans. Even banks were reluctant to lend to one another, suspecting each other’s financial health.
The international economy is then surprised with the event of a probable national bankruptcy by Iceland. Iceland has been consistently known as the top 10 countries to live in and her citizens earn more than 30 000 USD per capita annually. However, the country is now at the brink of national bankruptcy due to overexposed investment in the American financial institutions which are falling one after another.
In an economic downturn, one thing is certain, unemployment. In just September alone, more than 160 000 Americans lost their jobs and in October, the figure had increased by more than 50 percent. In Australia, the jobless rate rose to 4 percent and could increase up to five percent or more next year. When the strongest economic nations in the world are faced with such serious unemployment rates, things are worse in developing nations all over the world and recently, the International Labour Association stated that unemployment rate in ASEAN countries could rise up to six percent next year. Our neighbour, Thailand, is predicting a million job losses next year as the export market shrinks and some companies are already cutting the regular six working days to five days a week and stops overtime work.
The escalating unemployment which took place was largely due to the dramatic world economy slow down. In some countries, growth rate fell to decades low while some even faced recession. The falling demand from the United States and United Kingdom market crippled the Asian and Middle Eastern markets as these developing nations relied on their export markets to catalyst their economic growth. Our neighbour, Singapore, had already declared recession on October the 10th this year as demand from the American market had decreased significantly.
All the mentioned financial problems can be accurately summarised and translated into the stock market. A stock market is a mechanism which is quick to recognise current global issues, both good and bad and adjust prices of its stocks according to the investors’ demand. As such, one can easily observe the performance of the stock market to gauge the current economic situation.
Stock markets around the world fell to historic lows with the Dow Jones Industrial Average of the America leading the dive and drastically affected markets elsewhere. The American bourse fell to less than 9 000 points for the first time in years and major bourses worldwide lost more than 5 trillion USD in just over a week’s duration. Global bourses were expected to face more losses in the near future as public listed companies all over the world were posting huge losses if not eroded profits and their stocks had been devaluated to a great extent due to the massive sell-off by investors who were in fear of the volatile economic situation.
Certainly, governments around the world have been taking the initiatives to resolve the current economic problems presented. Until now, the American government via its central bank, has been slashing interest rates down to nearly one percent to stimulate economic activity and governments worldwide have been doing the same as well. India has reduced its interest rate to eight percent for the first time in 10 years and Japan is expected to cut interest rate down to 0.25 percent However, our government is still confident with our economic base and has not reduced a single interest rate point up to now, maintaining it at 3.5 percent.
To aid the suffering financial institutions, the American government had injected more than 700 billion USD and countries around the world had pumped trillions of dollars to ease the situation. For a moment, the situation had been under controlled but the economic condition is still volatile. In Malaysia, our government also came up with a RM5 billion fund to support our deteriorating stock market. However, these huge amounts of financial aid were still insufficient to completely resolve the current bleak economic situation as many of the financial problems stated were still unsolvable.
Economic downturn is a cyclical and widely expected occurrence every few years and governments worldwide constantly try their best to prevent that. However, the current situation is not a mere cyclical down cycle and could lead to a major recession which takes place every few decades. Citizens worldwide would hope that the current situation would improve significantly in the shortest time possible for the prosperity of the world. Of course, we in Malaysia would also pray and hope that our government would be able to handle the current financial problems with proper measures and free our people from this financial predicament.
