Global Financial Crisis: Impact, Challenges & Way-out

Earlier Crises Growth of real and financial sectors is essential for economic development. The financial sector has claimed an ever-growing share of the nations' income over the past generation. The financial sector comprises institutions which promote savings on the one side and investment on the other and also includes facilitators like, stock exchanges and merchant bankers. Any imbalance in the growth of the two sectors is a cause of concern. Over the years, the financial sector has gained prominence and is a prime mover for every economy. Financial crisis, in a way, is a reflection of the imbalance between the growths of the two sectors. The present study gives, in brief, an overview of the financial crises over the years; and the origin and features of the current crisis. Way-out measures- both stimulus packages and structural policy processes-are discussed. The paper also highlights the concern arising from excessive enthusiasm of the financial sector as compared to that of the real sector and examines whether the 'V' shape recovery over the short period is sustainable. The current financial crisis started in mid- 2007. It is global, has engulfed almost every country and is stronger in intensity and coverage than of earlier crises. Earlier financial crises included: --Great Depression of 1930s --South East Asian countries of 1997, --Harshad Mehta financial crisis of 1990s Charles Kindleberger, US economist & historian listed 38 major financial crises between 1800 and 2000, i.e. one in every five years and three months on an average with a tendency to come at a much faster pace over the last 50 years. (Kindleberger 2005) South East Asian Financial Crisis (1997) During the financial crisis in South East Asian countries, the currency and equity markets recorded a fall of 30-50 percent in the second half of 1997. These economies had earlier recorded exceptionally high economic growth rates savings and investment rates and disciplined fiscal position. They were viewed by the lenders to be the most attractive sovereign borrowers among emerging markets and were addressed as 'Asian Tigers'. They experienced credit boom in the 1990s; growth of the bank and non-bank credit to the private sector exceeded the growth in GDP. Credit boom was directed in a good measure to the real estate and equities, exposure to property sector accounted for about 25-40 percent of total bank loan. It was a neglect of financial sector reform that got these countries into trouble; liquidity crunch was caused by heavy reliance on foreign debt, primarily short term debt, for meeting the industrial expansion requirements and even it was not possible to have estimates of the extent of short-term debt. Great Depression of 1930s During the Great Depression of 1930s, measures were introduced to regulate financial sector by the US President Franklin D. Roosevelt. Commercial banking was separated from Investment banking under Glass-Steagall Act, e.g. the House of Morgan was broken into two halves: --Morgan Stanley, an investment bank; and --J P Morgan, a commercial bank. Investment banking covered: capital market funding of businesses, financial products and instruments, brokers and dealers in equity, debt and derivatives; while commercial banks, relied on public deposits and primarily had lending for working capital requirements i.e. in short-term operations and money market instruments. Bubble Burst 2007 In 1999, key parts of the Glass-Steagall Act were repealed by the Financial Services Modernisation Act (or the Gramm Leach-Billey Act and also called Sandy's Law). As a result, commercial banks could also take up investment business and financial advisory business. This led to competition between commercial banks and investment banking institutions resulting in to cuts in business-margin and broadening of the products base. …