Factors Influencing Global Economic Crisis of 2008-2010 (Essay Sample)

Factors Influencing Global Economic Crisis of 2008-2010
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Factors Influencing Global Economic Crisis of 2008-2010
The Global Economic Crisis of 2008-2010 was referred to as a failure that resulted in a financial crisis all over the world that has never been witnessed before. This financial crisis has been termed to be the worst since the Great Depression witnessed in the 1930s CITATION Sin11 \l 1033 (Singh, 2011). This crisis originally in the United States, initially impacting the housing sector. This was characterized by a huge drop in housing prices after they rose significantly in the year 2006 CITATION Seb10 \l 1033 (Dullien, Kotte, Márquez, & Priewe, 2010). This drop resulted in a collapse of housing mortgage market in the United States. This in turn resulted in foreclosure, repossession of properties and eviction of individuals from their homes. This brought about a great effect in the economies of industries not only in American but globally resulting in the collapse of various financial institutions that are vital in the global economy such as banks. However, in an effort to prevent further deterioration of the situation governments worldwide bailed out these institutions. For example, the Federal Reserve attempted to bail out financial institutions such as banks. They did this by injecting a whopping $1.3 billion in these institutions through investment in assets and loans CITATION CMo08 \l 1033 (Morris, 2008). This research paper examines three of the most influential factors that brought about the global economic crisis. A solution is proposed for one of these factors and the business strategies used for the application of this solution in Starbucks Corporation explained.
Factors Contributing to Global Financial Crisis of 2008-2010
The financial meltdown began in mid 2007 in the United States. It was manifested through a drop in housing rates and a collapse of the mortgage market. This led to the plummeting of stock prices all over the world. This brought about what has come to be known as the Great Recession. Several factors contributed to this. Three of the most influential include the reduction of the Federal Fund rate; the creation of subprime mortgages leading to the increased indiscriminate and reckless borrowing and lending by financial institutions and market instability.
By 2008, the Federal Reserve had greatly reduced the federal fund rate to a rate that was close to zero CITATION Aus09 \l 1033 (Murphy, 2009). Federal funds rate refer to the interest rates charged by the Federal Reserve to borrowers on loans. These low interest rates were implemented and maintained in an effort to expand the American economy. This is based on a macroeconomic expansionary monetary policy. However, with the low interest rate, there was increased borrowing. Increased borrowing resulted in heightening of asset prices. For this reason, there was increased consumer power. Americans were able to buy more houses. In addition, more consumers refinanced their houses by seeking second mortgages and loans that were securitized. This led to a rise in housing prices as witnessed in 2006. In addition, they were able to make investment in various markets. However, consumers were interested in the same commodities. This led to heightened demand thus resulting in inflation of the economy.
With the rapid rise in demand for houses in America, housing finance institutions experienced a rise in competition. To gain competitive advantage over other institutions, they increased their lending activities. However, as more consumers managed to purchase these financial assets, there was a decline in credit worthy clients seeking financing. This led to the rise of subprime housing mortgages. This incorporated providing mortgages to consumers who did not meet the credit requirements. This high risk taking strategy did not however bring about higher returns. This risky lending was further proliferated by Fannie Mae and Freddie Mac CITATION Anu13 \l 1033 (Shah, 2013). Fannie Mae and Freddie Mae who enhance the securitization strategy in mortgage lending, were initiatives by the government. They provided individuals with mortgages that were backed by securities in spite of their credit worthiness. The purpose of these government sponsored initiatives aimed to increase home ownership by increasing the supply of mortgage loans. However, with the rise of subprime crediting, America experienced a rise in housing debt. In addition, it drove housing prices through the roof thus furthering inflation. The rise of subprime mortgages led to the creation of a liquidity problem. The housing market plummeted in the middle of 2007 leading to unfortunate incidences such as evictions, foreclosures and repossession of houses by finance institutions.
Market instability is another contributor to the financial crisis of 2008-2010. The market conditions have large impact on the accessibility and global stability in the financial institutions. These conditions are largely affected by the credit risks taken by the lending institutions such as housing finance institutions and banks. For this reason, the provision of subprime credit lending services led to disorganization of the American market. This produced a ripple effect in the international market. As earlier mentioned, the crisis was initially manifested in the housing market. The market experienced a rapid rise in housing prices in 2006. However, this growth rate was unsustainable. This was further enhanced by high risk credit lending activities by the banks and other lending institutions. Less than a year later, in mid 2007, the housing prices crashed drastically. Economists estimate the percentage price plummet to be about 30% CITATION Cla10 \l 1033 (Norgren, 2010). This is an illustration of an unstable market. The risks in the credit market resulted in inflation which affected all other markets including the oil and food industry. This was further enhanced by a reduction in purchasing power of the consumers. This was contributed to by layoffs and retrenchments in industries whose markets were affected by the financial crisis resulting in higher unemployment rates and lower household incomes.
Resolving Market Instability
In order to resolve market instability, the Fed can implement macroeconomic interventions. This includes adjusting the federal fund rate through open market operations. This method is a monetary policy intervention that involves the purchasing and selling of government securities in the open market CITATION Mes16 \l 1033 (Mester, 2016). Through this method, the Federal Reserve is able to control the federal fund rate according to the economic condition being experienced. As aforementioned, the lower the open market credit rate, the higher the borrowing levels by consumers. This results in a higher consumption power thus higher demand and increased investment by consumers. This injection of funds in the economy can lead to inflation characterized by high prices of commodities thus resulting market instability. It is for this reason that the Federal Open Market Committee is advised by economists to raise credit rates. They have done this by increasing the federal fund rate, currently 0.5%, by quarterly additions CITATION Por16 \l 1033 (Portlock, 2016). This will give room for the Fed to implement monetary policies to improve the economic standing of the nation during another recession.
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