Global financial settings

As a result, there is a smooth network between different countries internationally. This system, therefore, serves to correct global imbalances, inspire confidence and offer enough liquidity for the ever-changing levels of trade. In the absence of such a system in the international financial environment exchange of currencies would be difficult and trade would be impossible. The international monetary and financial environment has several components. First is the foreign exchange market where currencies are bought and sold. This revocation gave finance industry the power to use derivatives from deposits to invest. This was followed by increase the federal fund rates to financial institutions in 2004. During this time, mortgage rates had changes too. Thus, there was a general prices of houses reduced due to the high supply.

This meant that the homeowners who could not make their payments were left without an option due to the low demand. Other causes of the economic and financial crisis include increased debt burden from the high borrowing rates, use of a wrong banking model and commodities boom. Effect on global economy The backbone of the financial sector are depositors who deposit their cash into banks and the banks in turn provide them with liquidity on request. However, the financial institutions also have other clients such as the debtors and creditors. The banks uses the cash deposited to invest by lending to their creditors. However, when the depositors lose their trust in banks, they withdraw all their cash leaving the banks with no money.

One of the factors that led to the slow recovery was the permanent reduction in GDP especially in Japan, the United States and the five most powerful countries of the European Union. Another reason that may have contributed to the slow recovery was a decline in the working population which is between 15 and 64 (Claessens et. al, 2014). However, at the time most of the population were either below the age of fifteen or above sixty-four which meant that they were not as productive. As a result, there was a slower potential for labor force growth which then resulted in a lower GDP after the financial crisis. As a way to mitigate the situation, a lot of financial instruments were used including equity injections, asset guarantees and asset purchases.

These instruments had always been used in the past crises, but in the 2007 crisis, they put in place faster to try and reduce the recovery period. However, this did not work as the recovery for this crisis was the slowest. Liquidity support was among the first line responses in the United States which were where the crisis began (Grover & Regmond, 2011). This liquidity provision was large and was made more available in the United States by various instruments and institutions used. Thus, most of the nations have come up with guidelines to control the finance and housing sectors. The 2007 crisis some investors bought mortgages with securities of subprime mortgages which was a huge risk because mortgage-backed securities had friendlier rates that government those from the government.

Although there are numerous policies and rules that have been implemented there is still a risks that a financial crisis can occur. The current challenges in the global economy include inequality and trade tensions. More than a decade after the financial crisis, the GDP is finally becoming strong and economic growth has been improving. This financial crisis was mainly caused by the collapse of the housing bubble which caused a ripple effect which resulted in other problems such as low-interest loans, increased demand for property and wrong banking methodologies (Reddy et. al, 2014). As a result, there were a lot of negative results on the economy of the United States as well as other nations in the world after. Although other sectors were affected, the financial sector was the most hit.

Governments had to come up with policies to mitigate the situation and currently the economy is back to what it was before the crisis. , Graham, J. , & Harvey, C. R. The Real Effects of Financial Constraints: Evidence from a Financial Crisis. Cambridge, Mass: National Bureau of Economic Research. org/title/us-trade-protectionism-and-the-global-economic-downturn/oclc/709778530&referer=brief_results Claessens, S. , Horen, N. , & International Monetary Fund. The impact of the global financial crisis on banking globalization. Washington, D. The Changing environment of international financial markets: Issues and analysis. Basingstoke: Macmillan. Retrieved from: https://www. worldcat. org/title/changing-environment-of-international-financial-markets-issues-and-analysis/oclc/315896312&referer=brief_results Grover, H. Leiden: Brill. Retrieved from: https://www. worldcat. org/title/developments-in-the-international-monetary-system-the-international-monetary-fund-and-international-monetary-law-since-1971/oclc/873607641&referer=brief_results Kolb, R. W. org/title/international-monetary-system/oclc/224036696&referer=brief_results Reddy, Y.