GLOBAL FINANCIAL CRISIS

UNIVERSITY OF KARACHI NAME: SYED WAQAS ALI SEAT NO. 1010173 CLASS: MEF 3 SEMISTER
RD

SUBJECT: APPLIED ECONOMICS & RESEARCH TEACHER: SIR SHAFIQ UR REHMAN

Contents
Acknowledgement We are extrmely thankful to ALLAH for blessing us the couradge, wisdom and ability to complete this research report. We sincerely thanks our course instructor Sir Shafique-ur-Rehman, our savior whose absolute efforts, out-of-the-box ideas and experience gave us the knowledge to gather data and compile it hw gathered all his endeavours to polish our skills and tought us to pick the best out of chaos. We are also thankful to "University Of Karachi" the globally renowned knowledge icon for imparting us superb knowledge and for giving us the oppourtunity to present our skills in the form of this report.

Introduction - Definition - Types of financial crisis - History of financial crisis Analysis - Global Financial crisis explained - Financial crisis of USA - Impact of Financial Crisis Suggestion - Islamic economic system as the solution of global financial crisis refrences

INTRODUCTION:
A financial crisis is a situation when money demand quickly rises relative to money supply. Until a few decades ago, a financial crisis was equivalent to a banking crisis. Today it may also take the form of a currency crisis. Many economists have come up with theories on how a financial crisis develops and how it could be prevented. There is, however, no consensus and financial crises are still a regular phenomenon. A stock market crash is an example of a financial crisis. The term financial crisis is applied broadly to a variety of situations Usually, some financial institutions or assets suddenly lose a large part of their value Types of financial crisis: Banking Panics (and recessions) Stock market crashes Bursting of financial bubles Currency crisis Sovereign default

History of financial crisis:

20th century

Panic of 1901 limited to crashing of the New York Stock Exchange Panic of 1907 pervasive USA economic recession w/ bank failures Panic of 19101911 1910 Shanghai rubber stock market crisis Wall Street Crash of 1929, followed by the Great Depression the largest and most important economic depression in the 20th century 1973 1973 oil crisis oil prices soared, causing the 19731974 stock market crash Secondary banking crisis of 19731975 United Kingdom Wall Street on the morning of May 14 during the Panic of 1884. 1980s Latin American debt crisis beginning in Mexico in 1982 with the Mexican Weekend Bank stock crisis (Israel 1983) 1987 Black Monday (1987) the largest one-day percentage decline in stock market history 198991 United States Savings & Loan crisis 1990 Japanese asset price bubble collapsed early 1990s Scandinavian banking crisis: Swedish banking crisis, Finnish banking crisis of 1990s 199293 Black Wednesday speculative attacks on currencies in the European Exchange Rate Mechanism 199495 1994 economic crisis in Mexico speculative attack and default on Mexican debt

21st century

20002001 Turkish Crises 2001 Argentine Crises 2001 Bursting of dot-com bubble speculations concerning internet companies crashed 200710 Financial crisis of 20072010, followed by the late 2000s recession and the 2010 European sovereign debt crisis

ANALYSIS: Global financial crisis explained

Everyone with a credit card knows how debt works. When you borrow money you have to pay the interest on the amount you owe.

& interest keeps making the amount you owe bigger.

The amount you owe is so big that all you can do is to pay part of the interest. In a nutshell this is the problem faced by all the countries of the world.

Country A takes money out of its economy to make interest payments to country B.

This means countries A economy contracts.

People loose their jobs & stop paying taxes.

In order to keep making debt payments country A then has to take out more loans & the debt burden keeps getting bigger.

Even if country B also owes money to country A & makes a payment to country A they are both still getting poorer because interest keeps making their debts bigger.

Fiscal conservatives start demanding with the govts to cut spending on things like social services, infrastructure & education in order to keep making debt payments.

when that happens people living in the country gets upset with the govt isnt doing anything for them & instead sending a tremendous amount of money to foreigners& they then gets angry on two sets of people foreigners & the govt & dats how things get worse. This is the root of global financial crisis.

Financial crisis of usa

USA income is 2.2 trillion and its expenses are 3.8 trillion

To make up the difference USA borrows money When USA takes loan it is called a bond

Bonds can be held by investors, banks or even foreign govt.

USA promise to pay interest on these bonds just like anyone else does when they take a loan And it takes new loans to pay the old ones . All the loans and all that interest adds up

USA has 14,000,000,000,000$ loan & thats equal to its entire GDP of the year i.e the value of all the goods and services produced by the American economy in a year.

This is such a huge amount of money that USA is running out of institutions to borrow from And it is having difficulties just paying the interest on loans

Historically USA income comes from taxes but every increase in taxes is followed by a increase in spending in anyway last few year the gap between taxes and spending got so huge that it is difficult to make up the difference. So raising taxes is not a good option anymore. Majority of revenue comes from social security & individual income tax.

But there is one more way to make money . to print more money ! but the problem is the more of something there is the less it is worth same goes for the US dollar. The more dollar there is the less each one will buy.

Thats the reason why commodities like gasoline, food and gold becomes more expensive its not because the commodities worth more its because the dollar worth less That is called INFLATION.

The foreign Govts which lend the money to USA look poorer and the USA look richer & when other countries look poorer one dollar can buy a lot of their currency so USA pays very little amount of dollars to their works.

With such low labor costs they can sell their products in USA at lower prices that any other USA manufacturer can. The easiest way for USA manufacturers to compete is to move their factories in other countries where there is low labor cost & they can pay only few dollars.

This causes a RECESSION. because of recession Americans loose there jobs stop paying taxes and start getting federal benefit

This means that USA has even less income & even more expenses. At the same time people who have jobs are desperate to keep it so that have to do more work but they r not paid anymore.

When your dollars are worth less and you r not earning more of them it is called STAGFLATION.

USA cant raise taxes & cut spending without making recession.

And USA cant create more money without making inflation.

For now USA can keep on borrow money but since it cant pay the interest on the loans it already has it makes the bankruptcy even worse.

There will be a day when USA will be unable to pay its bills. When that happens the investors, banks & foreign Govts who are counting on that money wont be able to pay their bills either.

If investors cant pay the bills corporations cant pay to their employees If Banks cant pay the bills u cant take loans n make any transactions The same problem will effect the foreign Govts

Thats called the GLOBAL FINANCIAL CRISIS.

Impact of financial crisis :

When the global financial crisis struck, the purveyors of conventional wisdom had it all figured out. Latin American countries would surely mismanage the crisis, as they have in the past. Economies that established partnerships with developed countries could rely on that insurance against instability. The growth rate of East Asian economies would not dip below the rates reached in previous decades. And the growth rate of economies, such as Irelands, which had enjoyed a good boom prior to the crisis, would rebound quickly and relatively painlessly. Not one of these predictions came to pass. Indeed, one of the striking aspects of the global financial crisis is how often the facts have contradicted what, according to conventional wisdom, was expected to happen. Most Latin American countries learned lessons from past financial crises and established economic stability through sound macroeconomic policies. As a result, the downturn there lasted only fifteen months, and Latin American economies are expected to grow by 5 percent a yearfaster than advanced economies. Countries such as the Baltic states, which joined the EU in the 1990s, discovered that their embrace of its economic rules and reforms offered little protection from the crisis. Their economies suffered far more than those in Poland and the Czech Republic, which took a more gradual approach to partnership. Middle-income economies in East Asia, despite assumptions that because they weathered the crisis so well they would continue to have high growth, have been losing competitiveness in both directions: Low-income economies in the region, with their cheaper labor, have cornered the market on low-tech products, while the developed economies, with their advanced knowledge and skills, dominate the hightech end. Foreign direct investment, public investment, and private investment have all decreased in the middle-income economies, making growth rates of over 6 percent a year in Malaysia and Thailand far from certain. Countries considered models in their transition to advanced economies, like Ireland and Spain, were thought to be immune from the most damaging effects of a global economic crisis. But just the opposite occurred. In Ireland, many observers were misled by the countrys two booms: a good boom based on sound economic fundamentals, and a bad boom following its adaption of the euro. Another predictionthat people will withdraw support from governing coalitions that react to the crisis by responding to markets rather than votersmay or may not prove to be wrong. Only time will tell.

Suggestions: ISLAMIC ECONOMIC SYSTEM AS THE SOLUTION OF GLOBAL FINANCIAL CRISIS :

ISLAMIC ECONOMIC SYSTEM:

This system accepts the market forces of demand/supply, the right to private property as well as the right to maximize profits. However, all these rights are not unbridled and unconditional rather they are limited by certain restrictions and prohibitions: PROHIBITIONS & RESTRICTIONS IN THE ISLAMIC ECONOMIC SYSTEM Divine Prohibitions Economic activities like Interest Gambling Hoarding Government Intervention oIn cases where exploitation is feared, Government intervention is allowed Moral Restrictions oWorldly life is a way to get maximum benefit for the life hereafter therefore, both the means and the end have to be right

REFERENCES:
WWW.SCRIBD.COM WWW.YOUTUBE.COM WWW.WIKIPEDIA.COM