What Is the Impact of a Global Financial Crisis?

The global financial crisis, also known as the world financial crisis, the subprime mortgage crisis, and the credit crisis, also refers to the crisis of global financial assets or financial institutions or financial markets. The specific performance is the sharp decline in global financial asset prices or the collapse or impending collapse of financial institutions, or the collapse of a financial market such as the stock market or the bond market. For example, the financial crisis that triggered the Great Depression in the West in 1930 and the financial crisis that broke out on September 15, 2008 and triggered the global economic crisis.

global economic crisis

The global financial crisis, also known as the world financial crisis, the subprime mortgage crisis, and the credit crisis, also refers to the crisis of global financial assets or financial institutions or financial markets. The specific performance is the sharp decline in global financial asset prices or the collapse or impending collapse of financial institutions, or the collapse of a financial market such as the stock market or the bond market. For example, the financial crisis that triggered the Great Depression in the West in 1930 and the financial crisis that broke out on September 15, 2008 and triggered the global economic crisis.

Basic characteristics of the global financial crisis

All or most of the financial indicators in the financial field have deteriorated so much that they have affected the stability and development of the economies of the relevant countries or regions and the world.
The main performances are:
1. The stock market plummeted. It is one of the main signs of the international financial crisis.
2. Capital flight. It is one of the other major signs of the international financial crisis.
3. The normal bank credit relationship was damaged, accompanied by bank runs, rare shortages of money, and a large number of bankruptcies and failures of financial institutions.
4. The official reserves have been greatly reduced, and the currency has depreciated sharply and inflation.
5. Difficulties in paying debts.

Global Financial Crisis Crisis Features

First, the economy has sustained high growth for many years;
Second, a large inflow of external funds;
Third, the rapid growth of domestic credit;
Fourth, it is a general over-investment;
Fifth, the price of assets such as stocks and real estate rose rapidly;
6. The trade deficit continues to worsen and worsens;
7. Currency is generally overvalued.

Origin of the global financial crisis

The global financial crisis began to emerge in the 19th century. In 1873, the German and Austrian economies prospered, attracting capital to stay in the country, and the sudden suspension of external credit led to the difficulties of the American Jack Cook company.
Take the US subprime mortgage crisis that started in 2007 as an example to introduce the origin of the global financial crisis:
The US subprime mortgage crisis that occurred in 2007 has developed into a comprehensive financial crisis, and has penetrated into the real economy and spread to the whole world, which has severely affected the world economy. But the subprime mortgage crisis alone is not enough to cause such a serious financial crisis in the United States. There are deeper and wider causes of the US financial crisis, which include at least the following three points:
The Internet bubble problem has not been resolved. In the 1990s, the IT industry in the United States was in full swing, driving the US economy to prosperity, but it also contained a lot of bubbles. However, the United States has not solved this problem. Instead, it is trying to cover up with the prosperity of the real estate industry. Since the 21st century, the Federal Reserve has continued to reduce interest rates, financial institutions have simplified house purchase procedures, loans can be issued without the need for a down payment, and even fraudulent credit rating assessments have encouraged subprime mortgages, which has led to a growing real estate bubble. The real estate bubble has merged with the Internet bubble that has not been resolved in the past, and risks in the financial market have accumulated rapidly.
The virtual economy is severely disconnected from the real economy. The duality of commodity use value and value, and the duality of physical form and value form, divide the national economy into two parts, the real economy and the virtual economy. The two parts should be roughly the same, but because the value of the commodity is different from the operating channels, trajectories, and methods of the use value, as well as the regulatory agencies and business entities, the value often deviates from the use value, which leads to a disconnect between the virtual economy and the real economy. When this divergence reaches a serious level, there may be severe inflation, huge fiscal deficits and foreign trade deficits up to the financial and economic crisis. One of the causes of the outbreak of the US financial crisis is that the virtual economy (its main representative is the financial industry) is severely detached from the real economy and over-inflated.
The United States has a deficit fiscal policy, a high consumption policy and an export control policy. The US government runs on fiscal deficits or borrowing. American families also rely on borrowing to support advance consumption. Household debt has exceeded $ 15 trillion. In the US industrial structure, capital and technology-intensive high-tech industries are an advantage, while labor-intensive daily necessities industries are a disadvantage. This determines that the United States must import labor-intensive products and export high-tech products. However, while the United States imports a large number of labor-intensive products, it strictly restricts the export of high-tech products with export control policies, which has led to a serious imbalance in trade and a growing trade deficit. How to solve the problem of fiscal and trade deficits? It depends on the global issue of US dollars, government bonds, stocks and a large number of financial derivatives. Through such virtual channels, physical resources (natural resources, labor resources, and capital resources) around the world are constantly flowing into the United States. The United States produces currency and other countries produce commodities. However, it is ultimately unsustainable. [1]

Events of the global financial crisis

2007 Global financial crisis 2007

February 13 U.S. mortgage risk begins to surface. HSBC Holdings adds $ 1.8 billion in bad debts to U.S. subprime mortgage business. U.S. largest subprime mortgage company Countrywide Financial Corp reduces lending
March 13 U.S. stocks were on the verge of bankruptcy, the Dow fell 2%, the S & P fell 2.04%, and the Nasdaq fell 2.15%
April 4 New Century Financial files for bankruptcy protection after cutting half of its staff
July 10 Standard & Poor's Downgrades Subprime Mortgage Bond Ratings, Global Financial Markets Shock
July 19 Bear Stearns hedge fund on the verge of collapse
August 5 Warren Spector, president of Bear Stearns , the fifth largest investment bank in the United States, resigns
August 6 American Home Mortgage , a real estate investment trust, applies for bankruptcy protection
August 9
August 10 US subprime debt crisis spreads, European Central Bank intervenes
August 11 Central banks around the world injected more than $ 326.2 billion in 48 hours to save the market. The Federal Reserve injected $ 38 billion into banks three times a day to stabilize the stock market.
August 14 The three major central banks in the United States, Europe and Japan once again injected more than $ 72 billion to save the market. The Asia-Pacific central bank re-injects capital into the banking system and delays interest rate hikes.
August 14 Dozens of companies including Wal-Mart and Home Depot announced huge losses due to the subprime debt crisis. U.S. stocks quickly fell to their lowest point in several months.
August 16 The nation's largest commercial mortgage company's stock price plummets, faces bankruptcy, U.S. subprime debt crisis worsens, Asia Pacific stocks suffer worst fall since 9/11
August 17 Fed lowers window discount rate by 50 basis points to 5.75%
On August 20, the Bank of Japan injects 1 trillion yen into the banking system, and the European Central Bank plans to increase rescue efforts
August 21 The Bank of Japan injects another 800 billion yen into the banking system and the RBA injects $ 3.57 billion into the financial system
August 22 The Fed injects $ 3.75 billion into the financial system and the European Central Bank adds another 40 billion in refinancing operations
August 23 Bank of England lends 314 million pounds to commercial banks in response to crisis. Fed injects $ 7 billion into financial system
August 28 Fed injects $ 9.5 billion into financial system
August 29 Fed injects $ 5.25 billion into financial system
August 30 Fed injects $ 10 billion into financial system
August 31 Bernanke says the Fed will work to avoid credit crisis hurting economic development Bush promises government to adopt package plan to rescue subprime mortgage crisis
September 18 The Federal Reserve cuts the federal funds rate by 50 basis points to 4.75%. The U.S. subprime debt crisis affects the UK's North Rock Bank and is intended to be sold.
November 01 Fed cuts interest rate again by 0.25 percentage point
December 06 Bank of England announces interest rate cut by 25 basis points
December 12 The Fed announces a 25 basis point rate cut and cuts the discount rate to 4.75%
December 13 U.S. and European Central Bank join forces to deal with credit crisis

2008 Global financial crisis 2008

On January 15, Citi announced that the bank had a loss of $ 9.83 billion in the fourth quarter and said it would raise $ 12.5 billion through public offerings and private placements.
On January 17, Merrill Lynch reported a loss of US $ 9.83 billion in the fourth quarter, with a loss of US $ 12.01 per share from a year-on-year gain of 241 million.
January 22 The Federal Reserve announced that it would cut the federal funds rate by 75 basis points to 3.50% and the overnight lending rate by 75 basis points to 4.00%.
On January 30 Swiss Bank announced that it was expected to suffer losses of approximately US $ 11.4 billion in the fourth quarter of 2007 due to the write-down of subprime assets of up to US $ 14 billion.
On January 31, the Federal Reserve lowered the federal funds rate by 50 basis points to 3.0% and the discount rate by 0.5% to 3.5%.
On March 12, the Federal Reserve announced that it would expand its securities lending program to lend up to $ 200 billion in government bonds to its primary dealers.
On March 16, the Federal Reserve decided to reduce the discount rate from 3.5% to 3.25%, and to create new discount window financing instruments for junior traders.
September 7 U.S. Federal Housing Finance Administration to take over Fannie Mae and Freddie Mac
September 14 Bank of America and Merrill Lynch, the third largest investment bank in the United States, have reached an agreement to acquire the latter for about $ 44 billion
September 15 Lehman applies for largest bankruptcy protection debt in U.S. history more than $ 613 billion
On September 16, Bank of America acquired Merrill Lynch, the third largest investment bank in the United States with a history of 94 years, for about 44 billion U.S. dollars. The price was only 30% of the peak price of Merrill Lynch.
September 17 Less than two days after Lehman Brothers filed for bankruptcy protection, the Federal Reserve set a precedent by announcing that it would provide $ 85 billion in emergency loans to America's International Group (AIG) at stake and take over the group in disguise.
On September 18, the six major central banks , led by the Federal Reserve, once again joined forces and announced a joint injection of up to 180 billion US dollars into the financial system to ease the tightness of the currency market.
On September 21, the last two of the five independent investment banks on Wall Street changed hands-Morgan Stanley and Goldman Sachs have been approved as bank holding companies and subject to Fed supervision.
September 24 The Federal Bureau of Investigation (FBI) launches a loan fraud investigation against companies such as Two Real Estate and Lehman.
On September 25, JP Morgan Chase Co. , the third largest bank in the United States, acquired the troubled American depository and loan institution Washington Mutual Bank for $ 1.9 billion.
On September 30, US stocks experienced Black Monday. The Dow fell 6.98%, the largest point drop in history and the largest one-day drop since the "911" event in 2001, respectively.
October 8 The US Federal Reserve, the European Central Bank and the Bank of England cut interest rates by 50 basis points; China cut interest rates by 27 basis points and suspended interest taxes.
October 13 Daiwa Life Insurance Company applied to the court for creditor protection, becoming Japan's first financial institution to fail in the financial crisis.
November 8 The G20 Finance Ministers and Central Bank Governors' 2008 Annual Meeting9 opened in Sao Paulo, Brazil. The participants agreed that it is necessary to reform the international financial system and take joint actions to deal with the global financial crisis.
December 29 With the deepening of the financial crisis, in 2009, for the first time in human history, as many as 1 billion people will be hungry due to food shortages.
December 30 Under the impact of the financial crisis, export-oriented Japanese companies suffered a heavy blow. By the end of 2009, Japan s auto manufacturing industry alone will have 100,000 employees to be fired.

2009 Global financial crisis 2009

January 7 U.S. government officially provides $ 20 billion emergency loan to Citigroup
January 19 British Prime Minister Brown on the 19th announced again the launch of a large-scale financial rescue plan to promote bank loans.
January 24 Microsoft's second-quarter net profit fell 11% and plans to lay off 5,000 people.
January 27 US car market sales in October fell 32% compared to the same period in 2007, which is the worst level in the US car market since 1991.
February 4 New US President Barack Obama actively urges the US Senate to pass a new economic stimulus package totaling $ 189 billion to save the US economy.
February 5 Hitachi expects a fiscal 2008 loss of 700 billion yen (US $ 7.8 billion), which is the largest annual loss for Asian companies since the US subprime mortgage crisis.
On February 6, Japan's Toyota Corporation announced that it would have its first annual net loss in decades, and the company's performance would change from the originally expected net profit of 50 billion yen to a net loss of 350 billion yen.
February 10 UBS released a quarterly report showing that the group experienced a loss of about $ 6.9 billion in the quarter, mainly due to the loss of investment bank risk positions, with a loss of $ 17 billion for the year
Credit Suisse loses 6.02 billion Swiss francs in the fourth quarter on February 11 , plans to lay off 5,200 people
February 12 The US and the House of Representatives reach a compromise. The final text of a new government economic stimulus package totaling $ 798 billion is formed.
On February 15, Japan's GDP shrank by 12.7%, a drop more than expected, the worst since the 1974 oil crisis
February 19 US $ 787 billion US stimulus plan is finally settled. This is the largest stimulus package in the United States since the Great Depression.
February 24 The impact of the economic crisis on Eastern European countries such as Hungary and Poland has deepened, exchange rates have risen rapidly, and foreign capital has fled, making some Eastern European countries possible to consider not repaying their debts. The second wave of financial crisis spreads
On February 27, the US government and Citi reached an equity conversion agreement. The U.S. government's stake in Citi will rise to 36%. On the same day, Royal Bank of Scotland (RBS) announced a huge loss of 24.1 billion pounds in fiscal 2008 and the British government guaranteed 325 billion assets
The fourth quarter financial report released by AIG on March 2nd showed that it had a huge loss of 61.7 billion U.S. dollars in the quarter, the largest single quarter loss in US company history. This is equivalent to a loss of $ 22.95 per share.
On March 6, the Bank of England and the European Central Bank successively reduced their benchmark interest rates by 50 basis points, to 0.5% and 1.5%, respectively, and their respective benchmark interest rates have fallen to historical lowest levels.
On March 9, Russia spent 35% of its foreign exchange reserves in the past five months. Its GDP fell by 8.8% year-on-year in a single month, and its industrial output fell by 16% year-on-year, the largest decline in 15 years.
March 11 Citi announced a profit of $ 19 billion in January and February 2009, almost reaching a profit of $ 21 billion in the first three months of 2008. Dow soars 5.8%, the biggest gain in 2009
On March 13, Bank of America announced that it achieved profitability in the first two months of 200 *. The Dow rose sharply by nearly 240 points, rising for the third consecutive trading day, and rising by more than 600 points. [2]

Impact of the global financial crisis

The occurrence of the global financial crisis has severely affected the world economy and seriously affected people's daily order.
Taking the US subprime mortgage crisis as an example, judging from its direct impact, the first to be hit are many home buyers with low incomes. Due to their inability to repay their loans, they will face difficulties in recovering their homes by banks. Secondly, in the future, more subprime mortgage lenders will suffer severe losses due to non-recovery of loans and even be forced to apply for bankruptcy protection. Finally, many investment funds in the United States and Europe will also be hit hard as they buy large amounts of securities investment products derived from subprime mortgages.
The first hit in the US subprime mortgage crisis is the banking industry. Attention to the risks hidden behind home mortgage loans is a problem that Chinese commercial banks should pay particular attention to at present. In the period when the real estate market as a whole is rising, housing mortgage loans are high-quality assets for commercial banks. The loan yield is relatively high and the default rate is low. Once a default occurs, compensation can be obtained by auctioning mortgage real estate. At present, real estate mortgage loans account for a considerable proportion of the assets of Chinese commercial banks, and they are also one of the main sources of loan income. According to the New Basel Capital Accord, commercial banks' risk provisions for real estate mortgage loans are relatively low. However, once the real estate market price generally declines and the mortgage interest rate rises at the same time, the default rate of repayment by home buyers will rise sharply. The value of real estate after auction may be lower than the total principal and interest of the mortgage loan and even the principal. The ratio of bad debts rose significantly, which impacted the profitability and capital adequacy ratio of commercial banks. Although the possibility of a general decline in prices in the Chinese real estate market in the near future is not high, in the long run the risk of mortgage loan issuance in the banking system cannot be ignored, and strict loan conditions and loan review systems must be implemented at this stage.
At the same time, the subprime mortgage crisis has also had a great impact on China's economy.
First, the subprime mortgage crisis mainly affects China's exports.
The subprime mortgage crisis has caused a slowdown in the US economy and global economic growth, and the impact on China's economy cannot be ignored, and the most important of these is the impact on exports. In 2007, due to weak import demand from the United States and Europe, China s monthly export growth rate has dropped from 51.6% in February 2007 to 21.7% in December. The US subprime mortgage crisis has caused China's export growth to decline. On the one hand, it will cause China's economic growth to slow to a certain extent. At the same time, because of China's economic growth slowdown, the social demand for labor is less than the supply of labor, which will put pressure on employment in the entire society increase.
Second, China will face the dual pressure of slowing economic growth and a severe employment situation.
The real economy, especially industry, is under tremendous pressure. The closure of a large number of small and medium-sized processing enterprises has also exacerbated the grim situation of unemployment.
Finally, the subprime mortgage crisis will increase China's exchange rate risk and capital market risk.
To cope with the negative impact of the subprime mortgage crisis, the United States has adopted a loose monetary policy and a weak exchange rate policy for the US dollar. The sharp depreciation of the US dollar has brought huge exchange rate risks to China. With the economic slowdown in developed countries, the continued growth of the Chinese economy, the continued depreciation of the US dollar, and the expected appreciation of the renminbi, the accelerated flow of international capital to China to find a safe haven will increase the risk of China's capital market. [3]

Events related to the global financial crisis

After entering the industrial era, the economic and financial crisis has always been accompanied by intermittent outbreaks of human economic development. Since the 20th century, the major economic and financial crises that have occurred globally include:
1929 to 1939: The Great Depression
With the collapse of the Wall Street stock market in October 1929, a devastating Great Depression swept through almost all industrialized nations and lasted for a decade in some countries. During the Great Depression, the highest unemployment rate in the United States reached 25%, and unemployment rates in Germany, Australia and Canada were close to 30%. The US economy bottomed out in 1933, and industrial output fell to 65% before the recession.
1973-1975: Economic crisis caused by the oil crisis
In October 1973, the Fourth Middle East War broke out. To combat Israel and its supporters, the Organization of Arab Petroleum Exporting Countries announced an oil embargo on the United States and other countries, and at the same time joined other oil-producing countries to raise oil prices, which led to the outbreak of the oil crisis. The crisis triggered the worst economic crisis since World War II in the major industrialized countries. Industrial production in the United States fell by 14%, and industrial production in Japan fell by more than 20%.
1980s: Debt crisis in Latin America
Since the 1960s, Latin American countries have developed large amounts of foreign debt to develop domestic industries, with total foreign debt exceeding $ 300 billion in the early 1980s. In 1982, Mexico announced its inability to repay foreign debt, triggering a "debt crisis" that shook the world. The debt problem severely hindered the economic development of Latin America. In 1988, the per capita GDP of Latin American countries was only 1,800 US dollars, which fell back to the level of the 1970s.
1990s: Japan's Bubble Economy Collapses
In 1990, Japan's real estate and stock markets began to experience catastrophic declines after years of excessive growth. As a result of the overall contraction of assets, Japan has experienced a long period of deflation and economic recession in 10 years. In the mid-1990s, Japan's economic growth stagnated and entered a "zero growth stage."
1997-1998: Asian financial crisis
Against the background of rising interest rates and the appreciation of the US dollar, exports of Asian countries whose currencies are linked to the US dollar have been declining. In July 1997, with Thailand's announcement of a floating exchange rate regime for the Thai baht, Asian countries generally experienced currency devaluations and a financial crisis broke out. In this crisis, Indonesia, Thailand and South Korea are the countries that have suffered the most. The GDP of the three countries shrank by 83.4%, 40%, and 34.2% in two years.
2007 to 2011: US subprime crisis and global financial crisis
For a long time, U.S. financial institutions have blindly issued mortgage loans to sub-credit buyers. With rising interest rates and falling house prices, the subprime default rate continued to rise, eventually leading to the outbreak of the subprime crisis in the summer of 2007. The crisis led to the closure of companies and institutions that overinvested in subprime financial derivatives, and triggered a severe credit crunch globally.
The US subprime mortgage crisis eventually triggered a global financial crisis. In September 2008, the bankruptcy of Lehman Brothers and the acquisition of Merrill Lynch marked the outbreak of the financial crisis. As the disaster of the virtual economy spreads to the real economy, the economic growth of countries around the world has slowed down, and unemployment has surged. Some countries have begun to experience severe economic recessions. [4]

Measures related to the global financial crisis

After the global financial crisis, various countries will take relevant measures to prevent the spread of the incident or minimize this harm.
Taking the US subprime mortgage crisis in 2007 as an example, the Chinese government introduced a series of fiscal and monetary policies to ensure the stable development of the economy.
Fiscal policy:
(1) Lax fiscal policy: reduce taxes (the reduction in securities transaction tax and the cancellation of interest tax have been implemented), and increase government spending (400 billion yuan in domestic demand is being implemented);
(2) Promoting foreign trade: The import and export industry is the first to be affected and has many employees (according to statistics, it has reached 100 million people). The first is to increase export tax rebates; the second is the appreciation of the RMB, which are all means to increase export competitiveness;
(3) Reduce the burden on enterprises: adjustment of labor laws, etc .;
(4) Strengthening social security / medical expenditures in public finance and maintaining the stability of the social and economic development environment;
(5) Industrial revitalization plan.
Monetary Policy
(1) Monetary policy has been adjusted in a timely manner since July 2008. Reduce open market hedging efforts, successively suspend the issuance of 3-year central bank bills, reduce the frequency of 1-year and 3-month central bank bill issuance, and guide the central bank bill issuance rate to decline appropriately to ensure liquidity supply.
(2) Easy monetary policy. In September, October, November and December, the benchmark interest rate was continuously lowered, the reserve requirement ratio was lowered, the deposit reserve ratio was reduced, and the benchmark loan interest rate was reduced. The purpose is to increase the market money supply and expand investment and consumption.
(3) On October 27, 2008, a 30% discount on the interest rate on the first home loan was also implemented; residents were supported to purchase ordinary self-owned houses and improved ordinary houses for the first time.
(4) The restrictions on the credit planning of commercial banks were removed.
(5) Adhere to differentiated treatment, guaranteed and pressured, and encourage financial institutions to increase loans for reconstruction, "agriculture, rural areas, farmers, and SMEs" in disaster-stricken areas.
(6) Foreign economic cooperation and coordination (such as currency swap between China, Japan, and South Korea, etc. [5]

Reflection on the global financial crisis

1. Government Market Relations: Supervision must not be absent from "financial innovation"
Reality has proven the root cause of the crisis-the oversight of the crisis by the United States.
This oversight is manifested in many aspects, the most important of which is the weakening of government supervision, which has led to excessive expansion of market forces, as if opening Pandora's box. Financial innovations in the absence of regulation have closely linked the real estate market to the capital market, and high leverage has sharply expanded risks. Many financial innovations have developed to the point where no one understands them. In the end, there was a collusion between the rating agency and the investment bank, which was a conspiracy between the market supervisor and the product creator and seller.
2. International cooperation response: Governments of all countries work together is vital
In crisis response, a big lesson lies in the timing and consistency of government responses. Looking back at the US government s response to the financial crisis, objectively speaking, many policies have shown results, the financial market has stabilized, and after the New York stock market has resumed its upward trend, the real estate market has improved and consumer confidence has clearly recovered.
3. Short-term emergency measures: more emphasis on sustainable development
Alan Krueger, chief economist and assistant minister for economic policy at the U.S. Treasury Department, said in an interview with the Economic Reference newspaper that reflecting on lessons learned, the crisis has made Americans aware of the fact that past Debt consumption is unsustainable and will reduce imports and increase exports. In addition, the United States has realized its own financial problems and is adopting large-scale financial reforms, including structural adjustments, strengthening consumer financial protection, and limiting speculative financial derivatives, to lay the foundation for future development. Countries around the world are actively looking for strategies for sustainable development after the crisis. Looking at the source of the crisis, the United States Government, on the one hand, promotes financial reforms and stimulates economic growth at home, and on the other hand, it promotes the rebalancing of the world economy at the international level. [6]

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