Global Financial Crisis and Inflation

Introduction

In the world today food prices is going up, financial and capital markets are collapsing, at the same time there is slow growth in the economy. There is also a global shortage on food leading to unprecedented recession in the world and it is feared that most governments are going to face turmoil from its citizens. The has led to increase in food prices, fear of investment in sock markets, collapsing of companies and business, loss of jobs and suicides in some countries.

In the law of demand and supply change of price of a product will cause the demand for the product to come down and the demand for the substitutes to increase. What the world is experiencing today can be described as using the law of demand and there are very many factors that affect changes in demand of any product of service. But in the case of the world today, allover the world there is an increase of prices of goods and services due to changes in the prices of a number of factors of production. The increase in prices was due to changes in climate, sub prime crisis and oil prices.

The change can also be attributed to change to some factors of production such as; increase in oil prices, and interest rates which were as a result of the subprime crisis. The subprime crisis has led to increase in the cost of capital which is an ingredient in the production of food. The business activities are continuous in nature and this means, people are paid for what they sell or produce (wages). When they are paid these wages in turn they also spend their wages to buy goods and services they have produced. This is called the business cycle of circular flow of income.

The diagram shows that one person’s income is another person’s expenditure and vice versa. The economic activities to be stimulated of people must hence be working and keeps the income flowing in every economy:

National Output = National expenditure = National Income

Picture one

  1. The household provides the firm with labor, land, capital (factors of production.
  2. The firm provides the household with payment on factors of productions.
  3. The household provides then firm with payments of services and goods.
  4. Firm provides the household with flow of goods and services.

Statement of the problem

The current rise in the down turn economic growth experienced by the whole world has led to shocking increases in the basic everyday commodity goods, reduction in standard of living and posing a bleak future for some countries that rely only on donations and grants. The effects as to what caused this situation in the first place are what are examined. The choices that are present before the citizens of world is also examined and evaluated as to what kind of future awaits them.

The kind of depression being experienced by the whole world is triggered by a combination of factors. The major cause of this sharp spike in the prices is the demand coming from India and China as they too seek energy sources in order to supply the industrialization that is happening to them. Considering that they are the most populous countries in the world, their sheer size in volume alone makes for a staggering amount of energy demand. Their middle class population is steadily increasing and they are all going to demand the same luxury and comforts that the first world nations already have. Despite the increased demand for petroleum products, the oil producing countries simply can’t manage to pump it out of the ground fast enough. The sharp increase in the demand will not be easily be met by the increased efforts for more oil wells and production as it can take years to increase the supply.

Another major factor that is causing the increase in fuel is the demand for land to be used as production facilities for bio-fuel crops. This means that the land intended for the use of agricultural crops only would be supplying the demand for fuel. While this is obviously in response to the rising fuel costs, it nevertheless affects the food and therefore also affects the decision of consumers to save even more. Since the transport vehicles that transport food from farm to cities are also using petroleum, the resulting price of food still rises despite the direct action to lower the costs of fuel. Their effects are also cyclical and mutually influencing. The effects of oil currently is shocking the rest of the world into new levels of inflation and commodity price increases but it is not the transportation alone that makes the goods expensive. The extensive use of petroleum products for all kinds of manufacturing companies is what creates the instant addition of costs to the everyday consumer goods that the increase in an oil price will have. All the modern technology like plastic products, metal products and communication devices that we have are all fuel intensive applications. The sudden drop in the capacity of oil producing nations to meet the demand creates this kind of intense pressure to raise the prices as the consumers have little choice anyway.

Research objectives

The research objectives will be:

  • Enquiring about the causes of the current financial crisis.
  • Finding out about the factors that caused this financial crisis.
  • Checking the data related to financial crisis to understand how the financial crisis can be managed and has right information to manage it.
  • Examine financial intervention techniques employed.

Research questions

The research question that this study seeks to answer is as follows:

  • What is the impact of financial crisis on the performance of governments?
  • How is financial crisis managed by economies?
  • What are possible relationships between inflation, interest rates, stock market and the current financial crisis?

Research Methodology (Brief)

There are two methods of research/ data collection in research papers: that is quantitative and qualitative. Quantitative method is applicable where the problem is known, the problem is based on theories and can be measured in numbers. The analysis can be done on tables, graphs, pie charts, gnat charts and other statistical theories and it relies on assumptions. There are a number of methods which are under quantitative methods. These include surveys, experiments and quasi experiment. Qualitative method is different from quantitative because it is used to measure human feelings, attitudes and perceptions.

In this research question both methods will be used. This is because most data will be collected from books and history internet resources. The problem of this research question is how and which direction the research problem will take. There is always a connection between the research from the research question and the methods or the collection tools used, since it influences the conclusions and the recommendations. Qualitative method will be used to collect the writers opinions, attitudes, perceptions and feelings on the on the relationship between financial crisis and economic growth. Quantitative method will be used in collecting actual facts in numerical at the same time; analysis of the data will be done in the form of tables, graphs and other statistical tools.

The data for this research has been obtained from internet sources, books and journals. These two sources of data collections have weaknesses as described below:

  • Books: Most of the materials to be used in this report will be collected from books. Many books have been written covering issues on financial crisis but the research questions has not been covered. Books will offer me with good general information that will assist me to complete this project.
  • Internet: The internet is also a very good source of data. In the internet different topics have been covered. Through the internet I will collect the relevant materials that show the financial crisis. Through the internet I will be able to get the latest journals and conference papers that cover my topic in greater depths. Through the internet I will be able also to request for more materials in the form of CDs for further reference. Through the internet I will learn more from conference papers about the relationship between financial crisis and mortgages.

Limitation of the research

This study is limited as it is considering current financial crisis. The scope of the study does provide enough space to discuss the reasons behind financial crisis and it impact on economic growth.

Another limitation worth mentioning is that this research will be done on a limited scale and has to be done in a short period of time as it is for academic purpose. Thus, the sample will not sufficient for the requirements. As the study will be conducted at the company level it will be difficult to analyze and generalize the actual performances of the firms. However, to generalize the research findings to a greater scale, it is recommended that the same research be carried out at a very large scale considering individual firms.

Literature review

The rising prices prompt governments across the world from E.U countries to the united state to increase or decrease interest rates so as to control their economies. Prices of petroleum products are subsidized and taxes lowered so that importers and exporters can have a competitive advantage over their competitors. Because of a continuous rise in the prices of petroleum products the industries increases the prices of the products and this leads to inflation. Inflation refers to persistent increase in the general price level over time. By analyzing the recent economic events inflation has got a number of effects to an economy. The following are the effects of inflation. Due to inflation income and wealth are redistributed arbitrarily, for inflation.

Imposes a tax on those who hold money as opposed to those who holding real assets. Inflation reduces the standard of living of persons dependent on fixed incomes, for example pensioners. It benefits debtors and penalizes lenders. This affect consumption of all products thus reduces development. Due to inflation banks charge higher interest rates. Due to inflation interest rates rise, both because people require a higher reward for lending money which is falling in value and also because the government is forced to take ant inflationary measures. Investment is discouraged by government ant-inflation policy because of inflation the prices of goods go high compared to the wages people are getting. Savings is discouraged by high level of inflation in our economies things are likely to cost more if bought later. Hence people will spend money to buy goods and stock them.this discourages savings.

Inflation encourages speculation by the purchase of really assets by borrowing later than investment by the use of resources in production. Indeed inflation discourages investment in long-term projects because possible government anti-inflation policies are difficult to forecast. Because of inflation inefficiency is encouraged because a buoyant seller market blunts competition as higher prices obtained for their products allow even inefficient firms to survive. Inflation does not promote health promotion. Good and efficient firms lack market while inefficient firms gain market.

Inflation generates industrial and social unrest since there is competition of higher incomes. Thus because of rising prices, trade unions ask for annual wages rise. Often demands exceed the rate of inflation anticipating future rise or seeking a larger shares of the national cake to improve their members’ real standard of living. Those with the most muscle gain at the expense of the weaker groups. Due to inflation employees in companies will strike in demand for high wages. This will force the companies to deploy its employees due to industrial unrests. By deploying a few workers the remaining once will then demand for higher wages. This situation will affect the operations of a company. If also the company reduces the number of its employees fewer products will be produced. If production is low fewer sales will be made also affecting the smooth running of the company.

Additional administrative costs are incurred in offsetting go-slow and work to rule disruptions, allowing for inflation in negotiating contracts and wage rates, revising price lists and labels. High administrative costs arise due to inflation. Due to inflation companies may change their suppliers this means that new contracts should be made. To sign a new contract with a new company takes some time; this will affect the progress of a company. Due to inflation also prices of products change. Time is taken at preparation of new price lists and price labels.

The rate of inflation tends to increase largely because high wage settlements in anticipation of higher future prices help to bring about the very rise which people fear. Since people are demanding for high wages then the rate of inflation increases this leads to an increase in the price of goods.

Effects of inflation

For the business community inflation has often been regarded as beneficial, on the ground that production costs tend to lag behind the upward movement of prices and, by widening the profit margin, inspire business confidence, encourage new capital investment and stimulate production.

But this reasoning does not apply where prices follow increases in production costs, as where a wage increase prompts a producer to raise his prices in order to protect his existing profit margin. Nor does it apply where inflation is excessive, for thein, in may destroy rather than stimulate business confidence, especially if wages and other costs rise more sharply than the prices at which the finished product can be marketed.

Types of inflation

The rate at which the general level of prices increases can vary. Hence there are several types of inflation.

  1. Creeping inflation is the term used to describe a rise in the price level at a rate of 2 to 3 per cent per annum. This type of inflation does not do serious harm and it may, in fact stimulate investment.
  2. Moderate inflation describes a rise of 4 to 5 per cent per annum and this rate is high enough to have undesirable effects.
  3. Rapid inflation, that is a rise of 6 per cent or over is positively harmful and have undesirable effects on incomes, imports and exports, savings and consumption.
  4. Hyperinflation is a runaway inflation during which prices rise at phenomenal rates. The value of money declines daily; people lose confidence in the currency; and the monetary system begins to disintegrate. People revert to barter trade as a medium of exchange because money which is rapidly falling in value is unacceptable as a method of payment. Eventually the currency ceases to function as money, and has to be scrapped. A runaway inflation occurred in German in 1923 towards the end of the year paper money was losing a half or more of its value in one hour. Wages were fixed and paid dailys. In 1924 the German government withdrew the virtually valueless notes and issued a anew currency.

The causes of inflation

The causes of inflation are complicated but can be explained by two kinds of forces affecting the level of prices, namely, demand pull and cost push.

  • Demand-pull inflation: Basically, information represents a situation whereby the pressure of aggregate demand for goods and services exceeds the available supply of output. in such a situation, the rise in price-level is the natural consequence. Now this excess of aggregate demand over supply may be the result of more than one force at work. For example, consumers might be spending a great proportion of their income; incomes themselves may have risen; or cheap easier credit facilities might have been used to finance a spending boom.
  • Cost-push inflation: If inflation is mainly induced by rising costs of production, it can be described as cost-push inflation. We can visualize a situation where, even though there is no increase in aggregate demand, prices may still rise. This may happen if costs, particularly the wages-costs, go on rising.

Now as the level of employment rises, the demand for workers also rises so that the bargaining position of the workers becomes stronger. To exploit these situations, the trade unions ask for an increase in wages rates which are not related to increase in productivity or the rise in the cost of living. The employers in a situation are likely to concede to higher wages claims.

As labor costs are often the main costs of production, firms may be compelled to raise the prices of their goods and services, in order to cover the addition to the wage bill. However, the price rises will lead to a further round of wage demand as people endeavor to restore the buying power of their incomes. In return, further price increases will results and the chain of events will continue to repeat itself in an inflationary spiral of prices and incomes.

It should be mentioned that cost-push inflation may be attributed to increases in cost of other wages. However, increases in wage rates unaccompanied by increases in output per man-hour are best known cause of rising costs.

Control of inflation

It is one of the principal aims of sound government to preserve the value of its currency by maintaining a price level that is reasonably stable. Efforts by governments to curb inflation have taken a variety of forms. They include:

  • High taxation: The effects of high taxation are to restrict purchasing power, and so, by reducing demand, to prevent rises in prices. For full effectiveness a government must be prepared to tax to the point of a ‘true’ budget surplus, i.e. to an excess of income over expenditure inclusive of budget outlay for capital purposes. High taxes, however although they have the advantage of leaving no legacy of debt and interest charges to be met in the future, may nevertheless have an adverse effect on the supply of work and private saving. Direct taxation can be used to mop up surplus purchasing power, whilst indirect taxes will make goods more expensive in the shops, so that buyers will not be able to afford them. Such a tax will of course have an inflationary effect, if the higher shop prices cause demands for greater incomes from consumers.
  • Savings encouraged: The encouragement of saving by the public through, e.g national savings campaigns, premium bond issues, and sufficiently attractive rates. This has a similar effect to taxation, except that it leaves a burden of future interest payments.
  • Monetary policy: An upward movement in the bank rate may cause a corresponding movement in short term rates as a whole. If borrowing becomes more expensive, some consumers may borrow less to spend, and businessmen may be less willing to finance stocks of materials or trade debtors. Economic activities may show down as interest rates increase.
  • Credit squeeze: The central bank acting as agent for the government has given advice or directions to commercial banks as to the desire volume of their lending; and as to the purpose for which such money should be lent. To underline the urgency of the situation the central bank can require the banks to make special deposits of cash at the central bank, thus reducing the reserve ratios of the banks, and their ability to create credit.
  • Administrative control: The government can limit its own expenditure in the public sectors of the economy, and may also impose restrictions on spending by local authorities. The demand for goods and services will be reduced and inflationary pressure eased.
  • Prices and income policy: The aim of the price policy is to secure price stability. This is very difficult to achieve. A price and income policy can be voluntary or statutory, that is, the government enforces compliance on trade unions and employers. However, bargaining, and where trade unions are committed to retaining their freedom negotiate on behalf of their members, the statutory enforcement of wage levels may not be a practical proposition.

Deflation and its effects

Deflation is characterizes by a situation which there is a deliberate contraction in the supply of goods and services. The effects tend to be to the opposite of resulting from inflation E.g. prices fall, demand falls, and if continued far enough, may have a paralysis effect on trade and lead to mass unemployment. A careful distinction must be drawn between deflation and disinflation. By contracting demand, the effect of deflation is to cause unemployment, with consequent business and general depression. The aim of disinflation is to try to dry up excess demand to restore equilibrium, without producing any unnecessary slack.

The capital market

Like the money market, the capital market is concerned with the operations of borrowers and lenders, but where as the funds borrowed in the money market are for very short periods of perhaps only a few days to finance operations arising from the trade transactions, borrowing in the capital market are for much longer periods and used to finance new and the upkeep and expansion of existing businesses.

The funds that flow into the capital market for investment come mainly from the savings of the public and un distributable profits accumulated in the reserves of business concern. From the regular payments of the small saver into savings accounts, life assurance premiums and contributions to superannuation and pension funds, vast sums are available for investment every year in government stocks and in the shares and debentures of industrial and commercial concerns. The main institutions in the capital market are:

  • Insurance companies: Insurance companies receive premiums on life assurance policies which may in existence for many years. Thus they have available large sums of money for investment in long term securities. the insurance companies are larger buyers of existing stocks and shares, take up new issues of shares and invest about fifty per cent of their investment in government securities.
  • Investment trusts: Investment trusts are joint stock companies which engage in the buying and selling of other companies shares. The invest capital in shares and gilt-edged securities on which they will be paid dividends and interest, and obtain any appreciation of their value. The net yield from these investments is distributed as dividends to their own shareholders.
  • Unit trusts: Unit trusts engage in similar activities to investment trust, they are not, however, public companies but trusts run by independent group of managers. The total investment is split into a large number of units of low nominal value. A large proportion of the funds are used to buy existing securities, but investment may also be made in new capital, particularly ‘right’ issues.
  • Financial corporations: They exist to lend money to industry. Banks aid insurance companies subscribe to their funds and each corporation tends to have a specialist function. They offer finances in the form of project loans and development loans.
  • Finance companies: They borrow money from the banks and the public and provide funds for hire purchase agreements which are used to finance the purchase of both consumer and capital goods.
  • The national savings banks: They collect the savings of a large number of depositors. The savings are invested in government securities.
  • Pension funds: Pension funds operated by companies, local authorities and government for their employees are invested in stocks and shares. The purpose is to earn an income on the fund, thus providing the pension required.
  • Building societies: They supply long term loans to people wishing to buy houses or other property. The most common repayment term is twenty – five years. Securities for loans lie in the deeds to the property. The funds of the societies are obtained from the money invested in them by the general public.

The stock exchange

The stock exchange is not directly involved in the raising of new capital; it is a market where already held stocks and shares are bought and sold. Unlike a savings bank, a business cannot offer its shareholders their money back because it has already spent on buildings, equipments and many other things a business needs, and so, before putting their money into stocks and shares investors must have some assurance that they can turn their holdings into cash with little delay should the need arise. It is the basic purpose of the stock exchange to provide a mechanism that makes this possible.

The stock exchange thus performs many important functions:

  1. It provides a market for the purchase and sale of stock and shares. If there was no stock exchange, investors would have to claim their money back from the companies. No business could function under such conditions because assets such as buildings, equipments, etc, have to be sold quickly in order to refund shareholders.
  2. It assists in raising new capital for industry. The exchange itself does not issue shares to the public. But by granting a quotation or permission to deal in new shares, the exchange makes it easier for companies to obtain buyers for new shares.
  3. It mobilizes savings for investments.
  4. It provides a basic for valuation of shares.
  5. It safeguards the interest of investors. A company which applies for a quotation must comply with the exchange requirements regarding publication of information considered essential for investors. In addition, businesses on the exchange is conducted by the members and according to rules drawn up by the council of the exchange.

Derivative market

Derivative market is a market that derive their value from the security market. This market trades in options and futures. An option guarantees the buyer a right to sell a specific security or instrument at a certain price which may be exercise, strike or striking prices. It can be described as a contract under which a person gets a right to buy from a specific seller a security or instrument or even receive some dollars within a specified time. This market has been growing due to increase in fixed income securities that are being traded as future offerings to the individual.

These options are traded by placing an order with a broker as it is normal trading environment. They involve mostly money and paper work.

Methodology

The purpose of the study is to find out current financial crisis and what it impact on the future of the world economy, or in other words, whether sustainable development will be achieved with the current crisis. In this chapter the researcher is discussing the: The Research Approach and Design, Instruments for data and continuous prose Data analysis and the processing of the survey results.

For the present study both qualitative and quantitative methods have been employed. To examine the financial crisis in-depth research had been done for data collection purposes for qualitative analysis.

Research Design

The main objective of this dissertation is to identify how the chosen research methodology will match the main objective of the dissertation question and how it will be achieved. Essentially, there are two types of research methodology; they are qualitative and quantitative research. While the quantitative research is carried out through obtaining primary data such as questionnaire, qualitative research is a research that is conducted through observations. Therefore, the method enables a researcher to explore the details of individual perceptions over phenomena.

Research Approach

The research approach that develops the methodology explained below is based on descriptive research theory and inductive reasoning. This is important to develop the foundation by which the research will be designed, conducted and consequently analyzed.

Firstly, it is important to establish the research approach in order to create a significant qualitative methodology. The research approach will review the types of research design and data collection methods. The research approach is built on logical relations and not just beliefs. In the research approach, the data measurements are dependent on the obtainment of required information and the quality of the information. The outcome of the research, therefore, is dependent on the measurement procedures used in the collection of the data, and this in turn is dependent on the types of data collection.

This is an important concept of qualitative research, where the description is either inductive or deductive. Inductive research begins with a question and seeks to describe it, and deductive research begins with the problem by working backwards to the answers. Therefore, this research uses the inductive approach to build the theory from the data gathered to explore possible conclusions towards causes and effects of financial crisis.

Research Method

There are many approaches to this research and they are investigation using two-research method, Qualitative and Quantitative. Quantitative approach involves the collection of figures and facts in a form of tables and graphs. Qualitative involves measuring people’s attitude, behaviors and opinions. One can note that a person’s perceptions opinions and attitudes cannot be measured using quantitative technique i.e. you cannot assign a figure to somebody’s attitude of something. Researchers have written that qualitative method of collecting data or information is through observation, interviews and analysis in a narrative manner. In this case, quantitative analysis will not benefit us much as compared to qualitative analysis.

Data Collection

Data for this project will be collected using internet search engines and library sources. Quantitative method of research will have little use as the writer will not carry out quantitative analysis of the data that is going out to collect information. Instead, the literature will be used in quantitative analysis. Quantitative approach will involve analyzing the people’s attitudes, behaviors and opinions which will be available in the internet search. The research will develop a methodology which could be based in descriptive and inductive reasoning. This is important because the research does not involve physical data collection and it creates a foundation by which the research will be conducted and consequently analyzed.

The main objective of this dissertation is to identify how the chosen research methodology will match the main objective of the dissertation question and how it will be achieved. Essentially, there are two types of research methodology; they are qualitative and quantitative research. While the quantitative research is carried out through obtaining primary data such as questionnaire, qualitative research is a research that is conducted through interviews and observations.

The researcher gathered information from various literature reviews, which are available at internet scholarly books, journals and newspapers. Theses materials used are not sufficient to add something new to the subject, which has been extensively researched.

Data analysis

After the researcher will collect the data, she/he will tabulate the data into tables and analyze it using frequencies descriptive and percentages.

The processing of the survey results

The processing of the survey results need not to wait until has been completed, but can begin as soon as the first questionnaires are received. The main steps are:

  • Coding: Nowadays the computer is used widely to process information. For that reason it is often advisable to code the information or even use a preceded questionnaire to facilitate the necessary processing and calculations.
  • Punching: Subsequently the information can be punched for computer purposes.
  • Data tabulation: With the aid of a computer, raw tables may be compiled. These tales are often only preliminary and may serve as guidelines for further analyses and condensed into possibly more meaningful tables.
  • Statistical processing: With the previous step as a basis the information can be processed further until it yields objectives and clear answers to the problem or opportunity which is being investigated.

Results and discussion

The world financial crisis which is one of the greatest financial downturn in the recent past has been caused by a number of critical factors. The happenings from the year 2001 to the subprime crisis are among the contributing factors. However some people feel mortgages as the main cause. From the literature review, I understand that economic development and stability is due to a combination of factors. These factors include inflation, financial markets, capital markets, oil prices and economic growth of some countries.

The current crisis has included a number of negative happenings in the world today. There has been a fall in price index of goods and commodities, banks have collapsed, stock markets recording the lowest general index, huge job losses have been experienced and many other factors.

The crisis can be traced to the practices practiced by the American mortgage funds of lending money to the American citizens who wanted to take advantage of the growing housing sector in the United States and it led to a case of subprime crisis. The subprime crisis arose because interest rates in the market started growing up and the American citizens were unable to pay for these growing rates.

The failing of the citizens to pay for their mortgages and interest rates led to the failure of financial market in the United States in the form of mortgage lenders. Because financial institution services are related through the sell of derivatives all institutions stated having problems in the financial centre. In a normal market interest rate represents a certain degree of risk. Majority of the businessmen in the housing industry had constructed many houses with the hope of cashing in of the boom in the industry were shocked when people started failing to pay for their homes due to high increased rate.

As banks increased interest rates borrowing was reduced slowing growth in the economy. The slow in growth in the economy led to losses of jobs and increased prices. Another factor that had to accelerate the current world crisis is the growing of China and India. The two countries are growing at a higher and faster rate; this led to the demand for more food and oil. In the process oil prices went up prompting an increase of price index for goods and services. This also contributed in a great deal since small investors opted to dispose off their investment for consumption. The stock market felt this impact of huge sales of stocks not because of the subprime crisis but because of high prices of goods and services caused by high prices of oil and high borrowing interest rates.

The continual decline in stock prices in various stock exchanges has led to any unpredictable situations in the market that has left many people to selling their properties. This is a factor of confidence among investors. Investors got worried that even the market may collapse since the year 2007 subprime crisis was being felt and in the year 2008 it went further to affect all banking institutions and stock markets. Now the investors felt that the black Monday of 1987 may replicate them. As mentioned earlier India and china growth accompanied by the collapsing sector in the United States are the major causes of these financial crisis. However the third world is also experiencing some sort of financial crisis which is not related to the mentioned factors. Take for example countries like democratic republic of Congo, Somalia, Haiti, Afghanistan and many other countries are experiencing financial crisis due to political instability in those countries.

The last factor that contributed to this financial crisis is the huge expenditure on wars of Afghanistan and Iraq. President George Bush spent the tax payers money to chase ghosts of mass destructive in Iraq leaving the America infrastructure fragile. The two wars instead increased terrorist activities as well as reduced the production of oil into the world market. Oil prices being one of the causes of the current financial crisis, it can be said that the war in Iraq and Afghanistan also contributed to this massive destruction of world development.

Financial crisis and derivative market

The derivative market has become one of the most hit market in this financial crisis. The financial crisis spread to all stock markets in the world because of these derivatives. It has spread though slow growth in the US which weakened the dollar and broad high interest rate which are the core pillars of this market. The market currently is de-functioning which has made the world wide financial crisis. Initially, it was seen as a crisis for the US market but because of this market it spread to all parts of the world. it is feared that if this market is not managed well it may spread all over the world slowing growth all over the world. Derivatives which acted as a midwife in international transactions is currently facing a crisis of its kind.

Therefore derivative market has become one of the casualties of what started as American mortgage industry problems. Stock exchange leaders are figuring out on how to salvage the derivative market to avoid a slow performance of economic development world wide. The world financial system seems to be in jeopardy due to the rapid increase in interest rate, weak currency, food shortage and worse demonstrations all over the world due to rise in prices of goods.

Bailout

As the world financial crisis hit hard on economies of the world there has been major problems both liquidity and bankruptcy to various mortgage renders in the unite states. The motor vehicle industry from fords and general motor vehicles are experiencing a crisis that has never been in the recent past. Mortgage renders started closing shops and the government of the united states felt that it was necessary to come up with a package that will assist the mortgage renders recover instead of collapsing. The government in the month of October and November secured a $700 billion from the US tax payers’ money to assist in the payout. The payout amount is intended to buy those mortgages from troubled institutions with the aim of injecting capital and liquid to these institutions. The government will sell the mortgages purchased to willing investors to recover the amount. This bailout is aimed at doing two things, stabilizing interest rates by keeping the value of mortgages at a reasonable value as well as injecting long term confidence among investors in the economy.

Conclusion and recommendation

The current financial crisis was foreseeable and necessary steps were not taken to organize a bailout of mortgage industry to bring down the interest rate. Its only that the leadership under president George Bush failed to provide financial leadership to the sector and this led to the failure of the whole world economy. Instead the leadership of bush contributed to this crisis by engaging in aimless war of looking for terrorists in Iraq a country that produces oil thus destabilizing the oil prices. The oil prices were also further complicated by the militias in Niger delta who contributed to the low production of oil in the area by kidnapping foreigners.

For the world to get out of this financial crisis, mechanism should be put in place to reducing the crisis by managing interest rates, stopping the Iraq war, giving scientists incentives to invent high power energy producing batteries to reduce the reliance on oil.

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