The Financial Crisis
The
financial crisis of the U.S and the global economy started late 2007 and early
2008. It has since affected the economies of the U.S. in a bad way as well as
the European Union countries. From these large economies it spread to other
parts of the world. At present the world is still struggling to overcome the
financial problems (Britten, 2013; Jickling, 2010).
Causes:
The
world does have ups and downs economically, but 2007/2008 is the most severe
down period. The cause of this is the effect of globalization and
interconnected economies and big transnational corporations. These are ones
such as Citicorp Bank, General Motors, AIG Insurance company and other huge
mortgage and lending banks and institutions. The financial problems are found
in the financial institutions, banking sector, real estate and productive areas
of the economies (Berberoglu, n.d.). We have overproduction of goods and
under-consumption of these goods. This means fewer profits for companies
leading to lay-offs of workers resulting in unemployment. Unemployment means
less money to buy. Real wages of workers declined while companies made huge
profits (Hurd and Rohwedder, 2010; Porter 2013). The sub-prime mortgage rates
in the U.S. and elsewhere such as in Iceland (banks) led to the crisis. Lehman
Brothers, the lending bank, collapsed in the U.S. and other mortgage holders
also collapsed (Blundell-Wignall, et.al, 2008; The World Bank, 2013). People
were accumulating more credit card debt as banks were optimistic on growth and
extended loans and credit. Huge institutions (banks and mortgage companies)
engaged in speculative corporate financial deals on the basis of optimism and
debts accumulated. All the financial institutions and governments were engaged
in financial activities as if there would be endless prosperity in sight. In
the U.S. large corporations made huge profits on low wages. With these profits
they invested and some bought out other businesses and formed mergers. They
also bought debt as investments based on interest being paid back. Banks loaned
and financed low-end wage earners to buy things like houses and other products.
Consumer debt rose because of ‘easy money’, and so debts increased and spun out
of control. However, banks did not cease loans but granted ‘new loans’ (secondary
mortgages) at high interest rates (Berberoglu,n.d.). These meant more profits
for banks. These banks and financial institutes invested abroad and big
manufacturers outsourced their production overseas and US workers became more
unemployed (Jickling, 2010).
Effects
The
unemployed found they could not pay back mortgage loans or credit card debt.
Foreclosures of properties took place and homes became unoccupied while banks
monies were tied up in these properties. Bankruptcies of individuals as well as
banks followed. Financial institutions and banks collapsed. The U.S. government
had to invest trillions of dollars in the banking system to try and avoid a
total collapse of banks (Berberoglu, n.d.; Hurd and Rohwedder, 2010; Porter,
2013). The economic crisis is still big in the U.S. Unemployment remains high.
It increased from around 7 million in 2007 to about 16 million in 2010.
Foreclosures and repossession of homes were at 1 million per year. Banks around
the world felt the impact and money ‘dried up’ for loans and debt. The U.S is
still struggling. The EU has enormous problems (Blundell-Wicknell et al., 2008;
Britten, 2013; Lantier, 2013).
Possible solutions:
The
U.S. government has passed laws in terms of what banks can do. Before, there
was less control as part of a free economy. Now there is a realization that it
was not a good idea. The U.S. is trying to stimulate the economy and create
more jobs through government incentives (Berberoglu,n.d; Blundell-Wignall et
al.,2008; Porter, 2013). The EU Central bank is taking action in some countries
to alleviate debts. These countries have been advised to cut back on
unnecessary spending and to manage their money and debts in a better way
(Lantier, 2013). The capitalist system seems to be part of the problem. More
jobs are needed so that people earn more and buy more. This consumption will
stimulate the economy. Production will then be increased and more jobs will be
created lessening unemployment. More employment means more money; more money
means better living standards and less poverty so the world will become a
better place (Hurd and Rohwedder, 2010; Jickling, 2010; Porter, 2013).
Economic Crisis Effect on the UAE
The
economic crisis of 2008 did not leave the UAE untouched. The crisis hit the GCC
also and the UAE as well. At first there was an idea that the impact would not
be as great as the region is not tied too heavily to sub-prime rates as in the
US or other mortgage or financial instruments as found overseas. The UAE
declined more than the other GCC countries. In 2008 the national Bank of Abu
Dhabi (NBAD) general index declined by 56.6% over 2007. Corporate earnings also
declined (Global Investment House, 2009). At this time Dubai’s economic and
financial problems also arose and difficulty was experienced in repayments of
loans taken for development. 2009 was predicted to not be better as oil prices
were lower and the GCC region’s economies are oil-based. Since then the
economies slowly recovered as oil prices climbed. Dubai restructured its debts
and confidence returned to local banks and loans were granted again compared to
the turmoil years when loans dried up. A lesson was learned that care should be
taken in these economies and it was realized that the region is not immune to the
financial crises of the world. The UAE is more careful now in terms of finances
(Global Investment House,2009; Hasan, 2010; Khamis and Senhadji, 2010).
Conclusion:
Mismanagement
of finances has led to the financial crisis. Companies need to pay better
salaries to workers. When the employees have more money they will spend more
and so increase consumption. Increased consumption leads to higher production,
and higher production means more jobs. More jobs mean a better society as more
people have money to spend.
Governments
in all countries need to control the economy better, see that banks do a better
job and control government debt and spending (Britten, 2013; Porter, 2013).
Reference
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