Financial Crises and the Failure of global - MyAssignmenthelp.com

Questions: 1. What was the main cause of the Global Financial Crisis (GFC) and why it has spread internationally? Do you believe that it could have been prevented? 2. One of the tools Australia and many other countries have used to fight the recession trends was to cut cash rates. The Reserve Bank of Australia has itself cut the cash rate from 6.75% in January 2008 to 2% in January 2016. Why do you believe central banks all over the world are using this tool to fight the recession in their economies? Do you believe it has been efficient in Australia and globally? 3.The article has mentioned the slow down in the Chinese economy and its impact on Australia. Why do you believe Australia cares so much about what is happening in China? What is the connection to the Australian economy? Give examples from history where you can demonstrate the impact of the Chinese economy on the Australian economy. Which areas of the Australian economy are usually impacted? Answers: Answer 1 Over the years, the economic scenario in the global framework has experienced significant dynamics, which had both negative as well as positive implications on the economic patterns across the world. One such economic phenomenon, which had immense effects (mostly negative ones) on almost all the significant economies of the world, is the Global Financial Crisis (Birdsall, 2012). The Global Financial Crisis, mainly had its initiation from July 2007, in the United States of America and by 2008, the Crisis expanded on the economics in full strength. In that period, due to the loss of confidence of the investors in the USA, the country suffered from a huge liquidity crisis. This in turn led to reduction of the valuations of the sub-prime mortgages, to counter which the governing authority of the country went to inject money in the monetary sector of the economy (Shiller, 2012). The crisis expanded devastatingly in September 2008, leading to the crash of the entire stock market, which had huge repercussion not only on the economy of the country itself, but also almost on all the global economies, the effects being more significant on the investment and financial sectors of the economies. The huge crisis originally initiated in the housing market of the USA. The primary reason behind the same was the huge amount of withdrawal of the sub-prime loans by the homeowners (investors as well as households) as repaying the mortgages became increasingly difficult for them due to the continuously increasing cost of the same (Tridico, 2012). This was the consequence of the fall in the prices of the houses, which was wrongly speculated to be continually increasing by the investors. This fall in price led the investors to a situation of acute debt, which in turn led to considerable numbers of defaults, thereby increasing the trouble of the banking and the financial institutions. The banks fell in the trap of acute liquidity crisis. The housing bubble burst in the economy has immense implications on the economy as it was accompanied by a huge credit crunch (Kamin DeMarco, 2012). The USA being the most significant and most influential economy in the world, any turmoil in the economy itself is expected to create huge implications on the other global economies as they are all connected directly or indirectly with the country. Thus, in the given scenario also, the financial crisis, which originated in the USA spread fast globally and had immense negative impacts on many other economies of the world as they went into an acute recessionary situation (Gieve Provost, 2012). The USA used to receive collateralized debts from the banks of other countries, which during this period were transformed partially into collateral debt obligations of the concerned country, thereby worsening the situation even more. As the banks and the financial institutions all over the world were involved in inter-country debt transactions and were exposed significantly to the mortgage loans mechanism, therefore, with the crisis cropping up and the continually increasing numbers of loan defa ulters in the economy of the USA, these banks also started incurring huge monetary losses (McCarty, Poole Rosenthal, 2013). The banking systems of the countries across the world being well integrated, in response to financial losses the bank tend to restrict the lending activities considerably. Therefore, in this situations, the banks also responded by limiting the loans given to each other, which in turn led to the creation of a huge shortage of supply of funds, which not only had adverse impacts on the investors but also on the firms and the households as lending was no longer easy for them. This is turn reduced the aggregate demand in the economy to a huge extent. This led to immense sufferings on part of the USA as well as those countries which were not directly linked to the crisis. The export demand as well as the number of exports of many countries experienced a downturn as the crisis also affected their trade relations with the USA. This in turn reduced the global trade volume, thereby making the financial crisis a global one. The international stock market, experienced huge losses in face of the Global Financial Crisis, which had long term affects the global economic scenario. The huge negative phenomenon, however, could have been prevented from the very first had the Federal Reserve of the USA taken the signs of the oncoming of such a crisis into account and had the same taken proper precautionary actions. The first signal of trouble came from the lending indicators as early as in November 2006, with the reported drop of home permit by 28 percent (Fratzscher, 2012). However, the over-optimistic behavior of the Fed, regarding the housing prices in the country and their over-confidence on the strength of the economy to combat any crisis led to the creation of the crisis itself. Thus, it can be asserted that the intervention of the USA government in the early stage of the crisis itself. Answer 2 Economic slowdown can be defined as the economic phenomenon of slowdown of the economic activities in a country in a particular period of time. This is usually indicated by the decrease in the GDP of the economy. The slow-down of an economy, if extended for a prolonged period can lead to the creation of a recessionary situation in the economy (Constantinescu, Mattoo Ruta, 2015). The slow-down of an economy leads to the creation of stagnancy in the productive activities of the manufacturing and industrial units of the country, which in turn leads to a decrease in the aggregate demand as well as aggregate supply in the economy. Thus, in face of the decrease in the productivity as well as demand, often to facilitate increase in the same the government needs to take expansionary fiscal as well as monetary policies. For the purpose of that, to allocate the required funds, the government needs to take debts from external sources (Mankiw, 2014). However, though there are positive several positive implications of debt financing on part of the government, the borrowings on part of the government can create several problems in the economy, especially in those economies where a recessionary situation prevails. The problems of high government debt includes higher debt payment of interests, hike in the taxes and also crowding out effects in the private sector of the economy, which can lead to immense sufferings for the households as well as the investors. The presence of debt can also lead to an upward pressure in inflationary aspects of the economy (Denis McKeon, 2012). Presence of government debt, usually gives rise to several problems in the economy as a whole. However, in many cases the government of a country, tries to deal with high debt by printing money, which in turn increases the supply of money, thereby causing inflationary situation in the economy, which becomes painful for the economy as a whole and becomes a national problem (Mande, Park Son, 2012). One of the recent examples of severe effects of government debt on the overall economy is the debt crisis, which cropped up in Greece, which was the aftermath of the financial crisis of the economy in 2007-2008. The huge crisis of debt in the country had huge implications on the economy, which required bailout loans in 2010, 2012 and even if 2015 (Armingeon Baccaro, 2012). The economy of Australia has considerable amount of government debt in the recent periods, which have been growing in the recent periods. However, the growth of the economy and its credibility in the investment and share market indicates that the current debt situation of the country is not a scenario to be worried for. However, this being an aspect of uncertainty, the government needs to keep a vigilant eye to prevent government debt becoming a bothering one. Answer 3 The economy of Australia has emerged as one of the most influential economies in the global scenario and over the years has shown impressive trends in aspects of economic development, growth and trade scenarios. The country has, over the years, developed robust trade relations with almost all the other economies in the global scenario, one of the significant ones being China. Being one of the global economic giants itself, China is one of the fastest growing global economies, with significant dynamics in the urban infrastructural and overall industrial sector (Dyster Meredith, 2012). China, for the purpose of growth in the overall infrastructural framework, demands considerable amount of raw materials, building materials and other drivers of growth like electricity and transport infrastructures. These demands of the economy can be catered to by the economy of Australia as the latter enjoys immense comparative advantages in the production and export of the above-mentioned products and services (Shambaugh, 2013). On the other hand, Australia also poses as an extensive market for the manufactured products, which are exported by China. This bi-lateral robust transaction pathway has contributed significantly in the development of a strong and long term commercial relation between the two countries. In the contemporary period, China is considered to be one of the primary and probably the largest commercial partners of Australia and both the countries enjoy significant import-export relationship with each other. Australia ranks as the sixth largest commercial partner of China, importing as high as twenty five percent of all the manufactured products from the country and exporting almost thirteen percent of thermal coal to the country. However, the relation between China and Australia is not however confined only to imports and exports. Apart from the import export activities, both the countries are also connected to one another in terms of investments and flow of capitals. One of the largest source of the Foreign Direct Investments of Australia, in the recent years (third largest specifically) is China. China makes almost 3% of the total investment in Australia as FDI and the sector in which most of the investments of the country flows primarily is the infrastructural sector, wit h China being specifically interested in investing in the infrastructural projects taken up in Australia (Schandl West, 2012). From the above discussion, it can be asserted that there is significant presence of commercial and investment relations between China and Australia, with the relation growing consistently with time. Thus, any fluctuation or turmoil in the economy of China is expected to have implications (positive as well as negative) on the economy of Australia itself. This pattern can be observed from the times of economic boom experienced by China, which had immense positive implications on the economy of Australia as the latter gained considerably from the economic boom of the former. However, the cause and effect relationship of the countries also have negative impacts on the economy of Australia as well (Ahuja Nabar, 2012). In the recent period, the economy of China has experienced considerable shift in their policies of growth as the same shifted towards a consumer-oriented framework. This in turn, by replacing the pro-producer policy framework, has resulted in a comparatively slower growth of the countrys economy. This in turn is expected to have negative impacts on the profitability of the firms of Australia which supply their products to China. Though the slow-down of the economy of China is expected to have its implications on almost all the global economies, the same is expected to be more acute in case of Australia as they are more exposed to the economic, investment and commercial policies of China. Not only is the latter one of the primary market for Australias exports (with over 28% of its total exports going to China), but also one of the primary source of investment in Australias infrastructural sector is China itself. Australia exports coal, gold, copper and nickel ores and minerals to China. Due to the slowing down of Chinese economy, the trade volume of Australia is expected to decline, which in turn creates an excess supply of the same in the domestic economy, which in turn lowers the price of these commodities. The domestic slowdown of China also leads to driving out of the funds of the Chinese investors from the economy of Australia, which in turn, is expected to have huge adverse negative impacts on the domestic economy (Reilly, 2012). China was one of the primary benefactors of Australia during the Global Financial Crisis, which helped the economy to prevent itself from sinking. While the demand for minerals and metal ores of China kept the productivity of Australia high, the inflow of investment from the former, especially in the real estate sector of the latter kept the housing prices of Australia more or less stable (He, 2012). The average rate of growth of China from 2000 to 2014 had been 9.75%, which decreased considerably to 6.9% in 2015. The consumer-based growth of the country is also expected to drive the growth even lower, which has led to decrease in the outflow of capital from the economy, thereby creating uncertain situations in the economy of Australia. The mining and mineral sector of Australia is expected to be the worst hit of the slowdown of the economy of China as the contracted demand of the latter directly affects the export demand as well as the productivity and income generation of Australia. References Ahuja, A., Nabar, M. (2012). Investment-led growth in China: Global spillovers. Armingeon, K., Baccaro, L. (2012). Political economy of the sovereign debt crisis: The limits of internal devaluation.Industrial Law Journal,41(3), 254-275. Birdsall, N. (2012). The Global Financial Crisis. Constantinescu, C., Mattoo, A., Ruta, M. (2015).The global trade slowdown: Cyclical or structural?(No. 15-16). International Monetary Fund. Denis, D. J., McKeon, S. B. (2012). 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