Table of Contents
3.0 Types of Financial Crisis
3.0.1 Banking Crisis
3.0.2 Speculative Bubble
3.0.3 International Crisis
4.0 Causes of the Financial Crisis 2007-2008
4.0.1 Loose Monetary Policy.
4.0.2 Global Imbalances.
4.0.3 Credit Boom.
4.0.4 Asset Bubble.
4.0.5 Financial Innovation
5.0 Impact of Financial Crisis
5.0.1 Impact to U.S Financial System.
5.0.2 Economic Growth Rates.
5.0.3 Personal Finances of US Citizens.
5.0.4 High Unemployment Rate.
5.0.5 Impact on the IMF
6.0 Policy Response
6.0.1 Term Auction Facility (TAF).
6.0.2 Economic Stimulus Act 2008.
6.0.3 Initial Cuts in Interest Rate.
7.0 IMF Response to the Crisis
Objective of this topic is to giving a scope about the recent global financial crisis 2007 which discussing about the causes and impacts of the crisis and focusing mainly in the United States. Then, it will focus on the policy response of the country towards the crisis. Role of the International Monetary Fund (IMF) is also given attention to understand how it works as the ‘international lender of last resort’. 2.0 Introduction
Financial institutions which play an important role in the economy, act as intermediaries between borrowers and lenders. Channelling of funds to individuals or firm that have bright investment opportunities takes place in the financial markets. Without financial intermediaries, it is difficult for companies to operate business. The economy also cannot operate efficiently if the financial system does not perform the role well. Systematic risk is a risk that could be failures of financial institution that freezing up capital market and eventually reduces the supply of capital to the economy. The United States experienced this systematic failure during 2007 and continues to struggle its consequences until 2009. Financial crisis occur when an economic encounter recession or depression caused by lack of liquidity in financial institution. In this circumstances, financial institutions lose huge part of their value. Financial crisis is not the same as economic crisis which affect the entire economy. A financial crisis can occur in a single sector and not always affect other sectors. The causes of financial crisis are different with the type of crisis. The financial crisis 2007-2008 started in August 2007 as a subprime mortgage crisis concentrated in the United States. The crisis became global but originally started in the financial sector of the United States and soon became global economic crisis. Mostly economies in the world were affected by this crisis because the United States economy can be thought as powerful economy in the world. 3.0 Types of Financial Crisis
3.0.1 Banking Crisis
Banks normally function by providing deposit accounts to people who want to make savings and it can be withdraw anytime. The banks then use these deposits to make loans and charge interest to borrower which are paid over a long period of time. If all the depositors want to withdraw money at one time, the banks will face lack of cash flow and will be bankrupt. This situation is called banking crisis. 3.0.2 Speculative Bubble
Some people buy stock by speculating the price, hoping that price of the stock will increase in the future. Therefore, if most investor buy stock speculatively, chances that the stock price will increase are be very high. When all the investors want to sell at the same time, then the price will likely to fall. When price of a stock is more than its current price plus dividends and interest, then the stock is said to show a bubble. 3.0.3 International Crisis
This crisis occurs when a country is forced to devalue its currency. This can happen either because of speculative attack or a country is default in paying its debt. When this occurs, all countries that were trading with this country...
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