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Effects of global financial crisis of year 2008

A financial crisis is a situation in which the value of financial institutions or assets drops rapidly (Soros 22). A financial crisis can occur as an end result of institutions or assets being overestimated and it can be exacerbated by investor conduct. The 2008 financial crisis was considered to be the worst economic disaster since the great depression.

The United States was the epicenter of the crisis and its economy was affected directly by the meltdown in the sub-prime mortgage market together with the consequences of the financial crisis and the resultant credit crunch. As a result United States economy fell to recession and is estimated to have shrunk by a huge percentage. The blow of the crisis on developing countries has been distant from universal. The most severely affected are middle-income countries, mostly in Central and Eastern Europe and the common wealth of independent states. This has been driven by a combination of the credit crunch and domestic imbalance such as large current account differences and housing bubbles. The rate of global industrial production declined at a faster rate in the year 2008 than during the 1930s.The proportionate decline in the global stock market wealth was rather impressive by the standards of the great depression. (La Porta 285-332)

Moving from the difference in the contraction of output to the effect on the labor market shows that there is even more variation in the outcomes across countries. In the developing countries, the unemployment rate has increased drastically, representing a rise in individuals without jobs. According to the Global Employment Trends, the number of unemployed persons ha s increased drastically.

Commodity and food prices have dropped considerably from their peaks reflecting the sharp downturn in global demand for nonfood commodities, the resolution of weather related supply disruption in agriculture and the removal of export margins on food products.

The top billing inflation rates have dropped from their peaks as the sharp decrease in economy activity and the declines in commodity prices influence consumer prices.

Following several years of somewhat stable currency market developments, exchange rate volatility in some emerging and developing countries has increased approaching levels which have not been seen for a long period of time.

Generally fiscal positions in developing countries has weakened due to slow domestic revenue growth and increasing spending on social programs in response to the crisis.

Works Cited

La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer. "The economic consequences of legal origins." Journal of economic literature 46.2 (2008): 285-332.

 

Soros, George. The new paradigm for financial markets: the credit crisis of 2008 and what it means. Basic Books, 2008.