"CASE STUDY The Global Crisis of 2007 The most"

Global financial crises usually involve an exchange rate crisis, a banking crisis, a debt crisis, or a combination of these three crises. Prior to beginning work on this assignment, read Gerber's (2017) Chapter 12, focusing on The Case Study: The Global Crisis on pages 299-302. Then, respond to the following components:

A)Describe the common causes of global financial crises.

B)Analyze the specific causes of the 2007-2009 global financial crisis.

C)Choose one country other than the United States, and address the following:

1)Compare and contrast the impacts of the 2007-2009 global financial crisis on this selected economy with the impacts on the U.S. economy.

2)Summarize how the country's government responded to the crisis.

3)Classify the country's current economic situation within the world economy.

doc/244056/sp/269796954/mi/780386911?cfi=%2F4%2F2%5BP7001012319000000000000000001FC7%50%2F16%5BP7001012319000000000000000001FE9%50%2F8%5BP700101231900000000000000001 NS facebook other craigslist music twitter tumblr (@) Miami Ink Official... places jobs CASE STUDY The Global Crisis of 2007 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 to borrowers with less-than-prime credit ratings. Many of these borrowers proved unable to manage the housing payments they had taken on, and many of the loans turned out to have clauses that made payment financially impossible for homeowners who could not refinance their loans within a year or two. 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 nsurance companies and investment banks, that had bought mortgage-backed assets. This would have posed serious problems for the United States under any circumstances, but at this stage the problem became global. 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. The financial services industry of 2007 did not look at all like the industry it was in the 1960s or 1970s. Second, financial markets had become much more integrated. Open capital markets and flexible exchange rates created new global flows of financial capital that were not possible in earlier decades. These larger and more integrated capital flows were augmented by high rates of savings in a number of emerging markets, such as China, that had played virtually no role in global finance before the 1980s or 1990s. 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. By early 2008, the subprime crisis had spread beyond the United States. One of the causes of its rapid contagion was the high level of innovation that occurred over the previous several decades. In the 1970s and 1980s, banks accepted deposits, which they lent to borrowers who wanted to buy homes. Beginning in the 1980s and increasingly through the 1990s into the twenty-first century, banks and other "non-bank financial entities" such as car financing firms, consumer credit firms, insurance companies, and others began to enter the market. Their strategy was not to profit from the interest they earned on the home loans, but to group a large number of loans together and sell shares in the entire package. This is known as securitization @. It can be done not only to home loans but also to car loans, P. consumer credit loans, and a wide variety of other types of debt. If you buy a share in the securitized package, you receive a return based on the interest that the ultimate borrowers-home owners, car owners, credit card owners, and so on-_pay to their lenders. The company that creates the securitized package of loans can, in turn, sell shares to another bank, a foreign-based insurance company, a foreign government, or virtually anyone willing and able to buy. Needless to say, if homeowners in the United States cannot pay what they owe, the owners of shares in the securitized package lose money.say, If homeowners in the United States cannot pay what they owe, the owners of shares in the securitized package lose money. The growing integration of global finance meant that these new products could be sold just about anywhere and finance crossed international boundaries with increasing ease. Pension funds in Wisconsin bought products that originated in Iceland, city governments in Germany bought securities based on Southern California real estate, and Hungarian home owners took out loans in Swiss francs from Swiss banks. Housing markets in many developed countries experienced a boom-finance was easy to obtain, prices were going up, and demand for new homes, either to live in or as investments, continued to increase. In the United States, home prices rose nearly 90 percent between 2000 and 2006, and the U.K., Spain, and a number of other markets experienced increases as great or even greater. Increases in home prices fed on themselves as they pulled more finance into the housing market. 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 New innovations in financial products and the growing integration of capital markets challenged regulators to keep up. With the growth of computer modeling and the application of advanced mathematics, many new financial products are complicated beyond nearly everyone's ability to understand, including the regulators and the corporate heads and risk managers of the companies that created them. Few, if any, regulators in the United States or elsewhere expressed concern, however. As explained by Alan Greenspan, the ex- chairman of the U.S. Federal Reserve Bank, most regulators were persuaded that financial firms would self-regulate since it is not in their interest to lend to someone who will default on his or her loan. His perspective reflected a much more general view that close regulation of financial man ts was not in the national interest since regulators were likely to impose limits that reduced efficiency while favoring the objectives of the regulators over the interests of market participants. The thought that the global financial system was at risk was inconceivable to all out a few analysts. Almost no one believed that the most advanced countries of the world could stumble into a crisis that would lead to the near collapse of their economies. Financial innovation, global financial integration, and financial deregulation can explain a lot of what happened. They do not tell us, however, why the crisis began in 2007 rather than earlier or later. As with many other crises, it is impossible to pinpoint an event that riggered the onset. There is one more factor, however, that played a very significant role and without which it is unlikely that there would have been the housing boom or the crisis. This factor is the large global savings imbalances that built up in the world financial system over the course of the first decade of the twenty-first century. To explain this, we need to briefly return to the Asian crisis of 1997-1998. The Asian crisis caused a reaction among many developing countries, both in Asia and elsewhere. The countries that suffered the greatest crisis were those that lacked sufficient dollars, euro, yen, and other international reserves to defend their national currencies. Their solution was mulate a large supply of international reserves by increa t account O WTheir solution was to accumulate a large supply of international reserves by increasing their savings and running large current account surpluses that they could use to purchase dollars, U.S. Treasury securities, and other secure, highly liquid financial assets. Large and important countries such as China began to increase their holdings of dollars, mostly in the form of short-term bonds, both government and private. Due to the sheer size of these accumulations, they began to play an important role in international finance. The savings held by governments are called sovereign wealth funds @, but private entities also increased their savings. MyEconLab Real-time data Globally, current account balances must total to zero. If China and other countries run large current account surpluses in order to accumulate international reserves, their balancing counterparts are large-deficit countries. The country with the largest current account deficit, both over time and in all recent years, is the United States. Table 12.3 D shows the five largest surplus countries and the five largest deficit countries between 2000 and 2007. The first column of numbers is the surplus or deficit for 2007, while the second column is the cumulative surplus or deficit from 2000 through 2007. The table shows that there are mainly, but not only, two kinds of surplus countries: Asian exporters and oil producers. Germany is an outlier, but is also one of the world's largest exporters. While five countries is not a lot to generalize from, the pattern holds, with some exceptions, if we look at all countries of the world together. Table 12.3 Current Account Deficits, 2000-2007 (Billions of U.S.$) Current Account Balances Country 2007 Cumulative, 2000-2007 Surplus countries China 371 8 973.8 Germany 252 9 768.9 Japan 244.0 1, 175.0 Saudi Arabia 95.17 399.7 Russia 76.2 460.0 O W00000001 FE9%50%2F8%5BP70010123190000000000 news facebook other craigslist music twitter tumblr Miami Ink Official... places jobs cur rent Account Balances Country 2007 Cumulative, 2000-2007 Surplus countries China 371 8 973.8 Germany 252.9 768.9 Japan 244.0 1 175 0 Saudi Arabia 95.1 399.7 Russia 76.2 460.0 Deficit countries United States -731.2 4, 660.1 Spain -145.4 494.1 United Kingdom -78.8 393.8 Australia -57.7 245.7 Italy -51.0 180.4 Source: Data from World Development Indicators, World bank. @ James Gerber The importance of large imbalances is that they were a supply of savings that became available globally to countries such as the United States, where households and businesses wanted to borrow in order to maintain higher levels of current consumption and investment. Without the savings of China, Japan, Germany, and the others borrowing in the United States, the United Kingdom, Spain, and elsewhere would have been much more expensive countries to live in, and the bubble in housing markets would have been less likely. As a result,