Dynamic Role Of State And Nonstarter Actors -Myassignmenthelp.Com

Question: Discuss About The Dynamic Role Of State And Nonstarter Actors? Answer: Introduction: Financial crisis is one of the economic phenomenons that seem to occur in a cyclical process. With ever-increasing connectivity among the different economies, effect of the financial crisis now a days have far reaching effect more or less on every economies. It not only affects the epicentre of the economy, moreover spreads like an epidemic throughout the various other economies leading them towards a dwindling situation (Bntrix, Lane and Shambaugh 2015). Among many economic crises, Global Financial Crisis (GFC) of 2008 is a remarkable one, owing to its magnitude, range and effects. It not only crippled the economy of the United States (US) moreover, affected almost 8 countries from European Union (EU) along with Mexico, Egypt, South Africa, Japan, Australia, New Zealand and several other countries worldwide (Dijkstra, Garcilazo and McCann 2015). GFC is acknowledged as the second largest global economic crisis next to Great Depression of 1929 due to its magnitude and far reaching eff ect. This essay is going to analyze the effect of GFC on the various countries and trace out the reason for its occurrence. Besides this, it will try to find out the whether there is any possibility to occur GFC again or not. To conclude, the essay will analyze various reforms taken by the government to control the GFC and proposed reform to make the world economy better. Possible causes of Global Financial Crisis: GFC is one of the largest economic disasters that shook the whole world gradually. Since 2006, there were various signs that entailed the US economy regarding the occurrence of this financial disaster; however, government authorities deliberately overlooked them (Claessens, and Kodres 2014). Once the effect of recession started to phase out, there were various studies regarding the possible caused of GFC. Most of them have similarities to some extent; however, each research came up with different theories regarding the possible reason of GFC. According to the Harvie and Van (2016) one of the main reasons for the global financial outbreak was real estate bubble of the US economy that deliberately brought in the subprime mortgage crisis into the economy since 2006. Back in 2004, Federal Reserve enhanced the Fed Funds Rate and it effectively decreased the housing prices. This reduction in prices of the houses made it affordable to the US citizens and the demand started to rose gradually, which ultimately forced the price of the affordable houses to go up. Community Reinvestment Act aided the realtors to enhance the supply of the house and grabbing the opportunity, lenders started to provide loans at 100% or more than the real value of the new houses. Besides this, banks of US found that it is more beneficial to sell derivatives than providing loans. Capturing the opportunity of unregulated derivative market, US banks sold derivative in a large amount overlooking a major concern; if the derivative business needs to be continu ed, then the banks required continued flow of mortgages (Kapan, and Minoiu 2013). Once the prices of the houses started to fall, supply suppressed the demand, which trapped the owners into the cobweb of mortgage and the flow of newer mortgages started to reduce. In order to check this, banks reduced their lending standards; however, the breaking down of the mortgage framework already has been started. Once the boom in the mortgage sector ended back in 2006, cost of the derivatives started to decrease. Everyone now wanted to cash their securities; however, banks did not have that much cash during that time leading to a chaos in the economy. According to the researches of Treeck (2014), income disparity among the US citizens is one of the main reasons that lead the economy towards this vicious cycle. With rise in Fed Rate, houses become cheap, however, excessive demand lead to higher price. One the other hand realtors provided loans to the house buyers at a higher rate and invested all the money into derivatives that become plumped, once the economy started to cripple. Income disparity lead to discrimination among the citizens and it constrained the US citizens to afford the house at higher price. Claessens and Kodres (2014) argued that, main reason for GFC is Gramm-Rudman Act, which allowed the banks to engage themselves into trading. Post the Gramm-Rudman Act, banks started to sell their profitable derivatives to the investors and the greed for more profit started to increase. Overlooking various important parameters bank relied upon the Mortgage Backed Securities to safeguard their derivatives. However, once the economy started to break down it did not came to any help, rather it lead to too many of toxic assets in the banking framework. As the rumours of economic system breakdown started, stock market also started to cripple. The Repercussion effect of the fraud activities of the mortgage agencies of US and the banks lead US into a largest financial crisis and the financial disaster has been spread to various economic systems worldwide. According to the researcher of this essay, besides the above-mentioned factors, Commodity Futures Modernization Act is another reason that allowed the GFC. It allowed credit default swaps that overruled the state laws regarding gambling. It allowed the banks to trade in energy derivatives that aided to the growth of subprime crisis. Examples of effect of Global Financial Crisis: Subprime mortgage crisis is one of the largest effect that brought in GFC, which not only affected the US economy, moreover hit hard several other economies over the world. Subprime mortgage being a mortgage backed security, collateral, which essentially need to be home loan. This derivate introduced an insatiable demand in the market for mortgage leading the derivatives impossible to price. Besides this, Credit Default Swaps can be treated as another example of effect of GFC that lead the US banks resold the mortgages in tranches. Moreover, Libor rate also rose up and intra-banking lending stopped that lead the bankers to panic and absorb the respective losses due to lack of money to support the Credit Swap. Impact of Global Financial Crisis in Australian economy: Australian economy is connected with US economy well. US economy depends upon on the Australias mineral resources largely and thus, the financial crisis of US has affected the country too. Signs of distress started arise, when two US financial companies, who deal in the Australian market, displayed serious problems with their holdings of Mortgage Backed Securities (Reinhart and Rogoff 2009). As the result, Australian banks refused to provide loans to the US banks. Besides this, export gradually reduces to some extent and it increased the interest rate in the Australian market. However, according to the assessment of the Australian Bureau of Statistics the financial crisis did not affect the Australian economy largely owing to its strong domestic economy that efficiently absorbed the shock in the market. However, according to the Reserve Bank of Australia, Australian stock market faced largest ever reduction in the equities during the period of GFC. During November, it reduced almost 54 percent, which is the highest reduction in the chart of Australian equities and it recovered sharply during the January to march of 2008. However, if compared with the equity market of other countries, then the reduction is the lowest among all and it portrays that Australian economy is potent enough to absorb any external financial shock. During 2008 to 2009, share prices of Australia dropped by 3% and there were high volatility in the market (Ravenhill 2017). Though there was a reduction, in cash rate during 2008 to 2009, overall interest rate was high at that time and bond pricing of the Australian banks has been reduced substantially. Considering this, it can be stated that Australian market is more resilient compared to the other economies that deal with the US. Chances of Global Financial Crisis repetition: GFC had taken place back in 2008 in the US economy, which affected almost every economy more or less, that are attached with the US through trading. According to the economic cycle, as shown in the figure 1, Global financial crisis returns after 7 year once an economy survives through recession and reaches to peak, suppressing the recovery stage (Xu and Couch 2017). Considering this, if US economy can be contested, then it will be found that the economy has gone through recession back in 2008 and now it is under the recovery stage. It is expected that economy will reach to peak by 2020 and later that, according to the economic cycle theory, GFC can arise again (Rey 2015). US Federal Reserve Chairman Janet Yellen has recently said that there will be no more GFC ever again with strong governmental holdings on the market and economic reform plans. However, according to Richard Sylla, there is 70% to 80% chance that GFC will repeat in coming years again. Main reasons for his statements are as follow (Rousseau and Wachtel 2017): Interest rate is still lower that influence the prospect buyers to take loans for new houses. High yield rate in free market is at an alarming rate. With 8% yield rate, US possess the highest yield rate. It portrays that government is manipulating the economy and transferring almost 2.4 USD every year from the US savers to borrowers. Taxation rate is much higher than the natural rate, same as the taxation rate of 2008. According to the thought of the researcher of this essay, scope of occurrence of GFC is considerably low. Though private debt bubble is attractive to the investors; however, they need to abstain them from the trap again. Debt to GDP ratio of US is considerably lower than the other developed nations like UK, China, Australia, Korea and Belgium that aids the economy to sustain in long run (Minsky 2015). However, it can be seen that private debt rate of the country is growing higher, which is an alarming situation. Reforms to control Global Financial Crisis: Back in 2006, alarm bell has already been raised regarding the incoming of GFC in the economy; however, negligence of the US Federal Reserve and greed of the US banks, mortgage firms lead the economy towards the financial crisis (Corbo, De Melo and Tybout 2015). Term Auction Facility from the Federal Reserve back in 2007, in order to pumping in liquidity in the US monetary market in order to raise the growth has made the final blow. To control the deteriorating situation, the US government has introduced various packages. One of the main bailout packages was of US$700 billion that was aimed to safeguard the US banks from bankrupted. Besides this, Economic Stimulus Package was also introduced by the then US President Barrack Obama. Along with this, there were unemployment benefit of $224 and $275 for public works. Moreover, the government tried to aid the economy with a college tax cut of $2500 and $8000 for homebuyers (Or and Aranda 2017). In 2009, government brought in the Homeowner Affordable Refinance Program (HARP) that was aimed to provide affordable home to the homebuyers, without moving into the mortgage trap again. By this time unemployment rate was as high as 10% and to control this US government introduced American Recovery and Reinvestment Act (APRA) as a stimulus package to the economy (Duffie 2017). Moreover, it has been proposed by the government to amend the Dodd-Frank Wall Street Reform Act prope rly, then it will be beneficial for the economy. Republicans of the US senate proposed plan to let the economy become capitalist market, where deregulation can be beneficial and it will do its work to ensure GFC does not happen again. Conclusion: This essay has studied the Global Financial Crisis and tried to trace out its possible reason of occurrence. From the analysis, it has been found that fraud activity of the US banks and mortgage firms has been one of the main reasons that took the economy towards the crisis. Besides this, subprime mortgage risk along with disparity in income is the different factors that caused the economy to face financial crisis. The essay has found that, crippling of financial condition not only affected the US market, moreover brought devastating effect for the other economies too. As the measure to control the crisis, there has been various stimulus package and proposed plan. Most of them have successfully triggered the economy to bring in a favourable condition by the end of 2009. With rising GDP of the country and reducing unemployment, the essay suggests that, there will be no GFC again like 2008 Reference: Bntrix, A.S., Lane, P.R. and Shambaugh, J.C., 2015. International currency exposures, valuation effects and the global financial crisis.Journal of International Economics,96, pp.S98-S109. Claessens, S. and Kodres, L.E., 2014. The regulatory responses to the global financial crisis: Some uncomfortable questions. Claessens, S. and Kodres, L.E., 2014. The regulatory responses to the global financial crisis: Some uncomfortable questions. Corbo, V., De Melo, J. and Tybout, J., 2015. What went wrong with the recent reforms in the Southern Cone. InDeveloping Countries in the World Economy(pp. 21-54). Diaz, D., Theodoulidis, B. and Dupouy, C., 2016. 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