The Role of USA in Global Financial Crisis

Introduction

The global financial crisis is affecting the entire world and it is causing slow down of the growth in both the developed and underdeveloped countries. The governments of all the countries are trying their level best to contain the crisis and many economists of the world believe that it is not yet over. The stock markets of the world are going down by 40% from the heights they have achieved. Major investment banks of the world have collapsed and different countries are initiating rescue packages that could cost more than a trillion dollars. The interest rates of the world are also experiencing diminishing returns as the leading indicators of the global economy are declining with alarming rates.

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The financial crisis across the global financial markets began in July 2007 due to the lack of confidence of investors in the securitized mortgages in US as a result of which the liquidity crisis erupted and became severe. The root causes of this current financial crisis that have been observed by a number of economists are global macro policies and poor regulatory framework of USA. Both causes have burst the stability of the world wide economies. The affects were severe on the civilized economies and therefore the struggling economies of the third world companies were also affected.

It seems imminent that those responsible for the financial problems must be bailed out because the global financial meltdown will affect the lives of millions of people and everyone in the entire world would be affected by this. The entire world is already feeling the damaging effects of the crisis and this is the reason why efforts should be made by the developing countries to solve this issue. Coordination between countries can only solve this problem in both short and long runs.

The global financial crisis besides affecting economies of developed countries have also affected less developed countries and the effects on less developed countries have lagged the entire world. The eventual impacts of global economic crisis on the entire world are quite disastrous as it weakens the financial condition of the entire world. The leakages in the financial market and economic slowdown are affecting the overall economy of the world.

To mitigate risks of further dampening of the financial and other sectors in the US the government stepped in with its stimulus package which injected some liquidity back in the system however there is still a lot to do to ensure that this financial crisis does not become a long term phenomenon (Rude).

Objective

The core objective of this research is to observe the role of the US in the global financial crisis. We would bring the events to light which added more turmoil to the finance sector. We shall also discuss the policy which made the financing easy and introduced the credit crisis and liquidity crisis in the economy. Moreover the impact of downsizing and the interest rate on the backbone of the economy would be defined in more elaborative manner. Recommendations will be given in the light of finding. This will be supported by testimonials and theories that will be used for the exploration of this research.

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Project aim

The lack of the research work on US role in the current financial crisis motivates newer studies in order to provide the flaws and drawbacks of the policy of the US Federal Reserve Bank. The aim of this research is to perceive the origin of the financial crisis and to conclude with the effectiveness of the arrangements made by the US for the reform such as stimulus package.

Research hypothesis

The research being carried out is based on the following research hypothesis.

The origin of the current global financial crisis is in the US. The collapse of the securitized mortgage enlarged the weakness of US housing sector which put derailed the economy of the US and its affects were observed in the global markets as well.

The research will analyze the hypothesis by collecting primary and secondary data. The data will be collected from various sources and analyzed to identify how US play its role in the current global financial crisis.

Research questions

  • What went wrong economically and what are the root-causes of financial crisis?
  • What are the impacts of the financial crisis over financial sector, housing sector and consumer market of US?
  • What is on stake in the present?
  • Did Stimulus Package achieve its goals of stabilizing the US economy?
  • How can the US achieve the financial stability?

Literature Review

The current financial crisis which has swept across major economies of the world is considered to have its roots in the US economy. Economists and analysts have argued that financial regulators should be blamed for not doing enough to avoid the current financial crisis. It was due to weak monetary and fiscal policies of Federal Reserve and poor visionary approach and negligence of Securities Exchange Commission, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission and Federal Housing Finance Agency that led the US to its worst financial crisis after The Great Depression in 1929. Furthermore, the crisis is much to be blamed for because of the over confidence of investors who did not foresee the warnings which economic system gave and had a myopic view of the weakening conditions in the credit industry which eventually led to huge crisis in the subprime mortgage market of the US.

The collapse of subprime mortgage markets has been due to three major reasons which are identified by Jain as continuing low interest rates, greedy banks & mismanagement of derivative markets and above all beyond control lending by banks to creditors in the housing industry (Jain 104) which reached $10.143 trillion in the year 2007 (Federal Reserve Bank). Over recent years the housing industry experienced rising price graphs and attracted investors which led banks to lend funds to even those who were credit-unworthy. Banks reached exposure up to 70% of their capital and slow or no repayments of these high risk subprime loans became a credit problem for them. This eventually led to collapse of large house financing companies such as Fannie Mae and Freddie Mac (Kirchgaessner and Sender). The liquidity crisis came after credit crisis which sucked out the liquidity from financial institutions and investors pulling their funds from the capital markets caused panic in the market. Despite of the interest rate cuts by Federal Reserve Bank and other interventions by the government to support ailing financial institution the liquidity crunch could not be avoided (Allen and Carletti). The initiatives by the government is largely contained the possible outbreaks of the financial crisis however there is still much to do as spillover from financial sector is depicting poor forecasts for the coming months.

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The current financial crisis has impeded the international business as US corporations are finding it difficult to sell their products elsewhere when there is overall decline in the local market. A mix trend is observed in other countries where on one hand European and Middle Eastern countries and Japan are already down in their economic activities and on the other hand countries like China and India which are mostly dependent on the US market for their exports are currently unaffected by the economic crisis but are expected to experience downturn if the current financial crisis continues for another few years (Toporowski). It has also been observed that private companies in many countries have sought support from their governments by taking stake in them. This is move seen as to preserve these companies and also to avoid shocks in their financial markets which could yield in much wider and devastating shocks resulting from liquidity and credit crisis (Vina and Stirling). Also IMF is under pressure due to its limitations of financing countries which have been adversely affected by the current financial crisis. Therefore, there are still dark clouds looming over some countries whose faith was depending upon the demand for their products and services in the US (IMF).

Research methodology

Research Methodologies are considered as an important factor as far as analysis of an element is concerned. Research has always been considered as an element of utmost importance because the results that are derived from these methodologies help the researcher in driving a proper conclusion. This paper is related to determining the root causes of financial crisis in the US therefore emphasis is laid more on qualitative research and conclusions are derived from this research. In the research methodology section different methodologies of research will be elaborated and how they will be used in this paper. Moreover, emphasis will be laid on the limitations of research and best possible methods of research will be selected to complete the entire project. This section will inculcate all the elements that are related to research. One of the most important elements in research is the selection of an appropriate approach and the viability of that approach. This part must be dealt with extreme care and it must be implemented and confirmed during the planning and the evaluation stage of the research project. The concepts regarding the research are quite wide and varied and there are different schools of thoughts about various methods that are practiced and used in the contemporary academia. Throughout the years there have been many suggestions that pertain to different types of methods methodologies that are applied in different fields of research. These methodologies are applied to attain the short and the long term objectives of a research project. The professionals that conduct research stresses a lot on achieving their targets and objectives, ultimately they reach high quality decisions if the research is conducted in an appropriate manner. In this research, both primary and secondary sources would be used and both sources would help us to achieve an analysis and comparison of the data gathered. The analysis and comparison will then be used to draw inferences regarding the subject and the results in turn will be used to develop recommendations pertaining to the role of US in the current global financial crisis.

There are two broader aspects of research that are widely used by different organizations and researchers to conduct a research. These aspects are known as deductive and inductive approaches. The deductive research approach is applied by making a detailed over view of a specific hypothesis. Normally, this is done by first and foremost declaring an objective of the research and making a complete and focused statement for the purpose of the research. After the formulation of the above two criteria, the research proceeds and in the end the research hypothesis is either accepted or rejected. The topic of the research is tested and examined to ascertain the implications involved. This approach is very frequently used especially when exact sciences such as chemistry and physics are the subject of the research. These sciences involve pre established laws and require a base for explanations, the estimation and anticipation of various phenomenon, and the prediction of the occurrence of these phenomenon so that these factors can be controlled for the purpose of the research.

However, the methodology prescribed and implemented for this research has its limitations due to its subjectivity to certain issues which are necessary to be underlined in the following in order to define the scope of the current thesis and set out the basis for the results that this report will conclude upon.

Expected outcome

Through this research we will evaluate the root causes of the financial crisis which were embodied in weak financial and regulatory framework and management. It will imitate the subprime mortgage market of US with its consequent effects.

Limitation

Since this is qualitative research, which requires time to gather data, analyze it and finally to interpret it, so the research is time constrained. Despite of other limitations, the most important and crucial limitation is the unavailability of secondary source data which would form major part of the current research. Very little amount of information is present that could help in the research. The primary research that will be carried out during the process may have some limitations due to the number of participants and their responses to research questionnaires may be affected by factors such as late replies, biasness towards the subject and misinterpretation of questions.

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Results

Strategists suggest that the results of economic crisis are quite wide and varied and this havoc might be disastrous for the entire world in both the short and the long run. Financial institutions are getting weaker and they collapsing like a pack of cards. USA along with other countries have experienced the aftermaths of this economic crisis and therefore in the current scenario all the developing countries of the world are joining their hands and they are working together in order to resolve this issue. If this issue cannot be resolved or if takes time to resolve then certain strategists and analysts suggests that it will hurt the development phase of many countries and besides underdeveloped countries the developed nations of the world would also suffer from this havoc. Moreover, industries and development of the entire world would suffer that is the reason why United States of America should take the driving seat and control the situation. They must play a vital role in the development of the world and must take effective measures to resolve this issue. When USA will intervene in this situation then a positive change can be expected in both the short and the long run. The role of USA in the global financial crisis is huge because the US is considered to be the economic power of the world and this is the reason why their policies are usually adopted and embraced by other countries. However, if the US does not intervene in the situation then analysts believe that the global financial crisis cannot be controlled. The impacts of these financial crises would range from financial contagion in the stock markets to slow development in the world. Therefore, the strings of the economy should be bound together and USA should play a vital role in this global financial crisis.

Recommendations

This research will conclude on a note about the implications of United States on the global financial crisis and what role does US play in the global financial crisis of the world. The recommendations that will be discussed in detail in this research are listed below:

  • The United States of America should motivate their think-tanks and economists to develop strategies that are favourable in both the short and the long run.
  • The Fed and the IMF should take viable steps and they must incorporate all the developing nations to work with each other and develop strategies in order to face the global economic crisis.

Furthermore, other strategies will be discussed in the research and each and every aspect of the role of the US will be discussed in detail in the entire research. However, the research will concluded with stating the hypothesis and at the end through different approaches the hypothesis will be either accepted or rejected.

Works Cited

Allen, F. and E. Carletti. The Role of Liquidity in Financial Crisis. New York: Jackson Hole Symposium, 2008.

Federal Reserve Bank. Assets and Liabilities Review. 2009. Web.

IMF. Financial Stability Report. Geneva: IMF, 2008.

International Monetary Fund,IMF. Global Financial Stability Report: Market Developments and Issues. Washington: International Monetary Fund, 2004.

Jain, A. K. “Regulation and Subprime Turmoil.” Critical Perspectives on International Business (2009): 98-106.

Kirchgaessner, S. and H. Sender. “Hedge Fund Chiefs Blame the System for Financial Crisis.” Financial Times 14 November 2008: 19.

Maykut, P and R. Morehouse. Beginning qualitative research. Bristol: Routledge, 1994.

Porter, M. HOW ON EARTH DID ALL THIS HAPPEN?!: A Walk Through the Events that Led to the Current World Economic Crisis (Paperback). California: CreateSpace , 2009.

Rude, C. The Global Financial Crisis. Briefing Paper. New York: Friedrich Ebert Stiftung, 2008.

Shiller, R. The subprime solution. London: Princeton University Press, 2008.

Toporowski, J. “International Business and the Crisis.” Critical Perspectives on International Business (2009): 162-164.

Vina, G. and C. Stirling. Royal Bank of Scotland, HBOS set to be Taken Over by Government. 2008. Web.

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NerdyTom. (2022, July 11). The Role of USA in Global Financial Crisis. Retrieved from https://nerdytom.com/the-role-of-usa-in-global-financial-crisis/

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"The Role of USA in Global Financial Crisis." NerdyTom, 11 July 2022, nerdytom.com/the-role-of-usa-in-global-financial-crisis/.

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NerdyTom. 2022. "The Role of USA in Global Financial Crisis." July 11, 2022. https://nerdytom.com/the-role-of-usa-in-global-financial-crisis/.

References

NerdyTom. (2022) 'The Role of USA in Global Financial Crisis'. 11 July.

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