The Financial Crisis

1. What is the origin of the problem: banking, currency, macroeconomic or political?

The problem is banking, macroeconomics as well as the political issue. Primarily, the financial crisis was caused by the laxity in the regulation of the financial industries. The deregulations allowed money to lending institutions to engage in hedge financial tradeoff with derivatives. Therefore, banks solicited more mortgages to maintain their businesses when the Federal Reserve increases the fund’s rate same as the mortgage rates the house cost fell drastically with supply outpacing demand.  The homeowners could neither afford the payments nor sell the houses. These prices of the derivatives failed, and the banks stopped loaning to each other. It was the initiation of the financial crisis leading the world’s recession.

2. How did Iceland recover?

The Iceland economy survived after the government secured a $10 billion loan from the International Monetary fund (IMF).  The reprieve was facilitated by the government that stepped in to aid the local depositors and to seize the domestic assets of the individual Icelandic banks with IMF for backstopping the deposit guarantee. Moreover, the Iceland success is as a result of its adoption of the austerity measures that ensured higher rates of interest taxation to reduce the deficit thus avoid debts.

3. The Social Impact of Financial Crises; Evidence from the Global Financial Crisis. World Bank

The financial system can hugely contribute to economic growth through the provision of the necessary tools for risk management. However, in the event these tools do not manage the risks, it can lead to tremendous and devastating socio-economic impacts. Case in point, the financial crisis that hit the world in 2008 to 2009 has been seen to have transformed many lives even in advanced economies. The hit by the world’s financial crisis has impacted even other countries.

4. Based on the same paper, do you believe the global financial system is at risk?

According to the assessment of the paper, IMF has raised concern on the global financial stability issuing a warning that the financial crisis may resurface should the markets underperform. Therefore, if the economies fail to keep up with the IMF recommendation of keeping markets on the mark the global financial system remains at risk.

Refferences

Hill, C. W. L & Hult, G. T. M. (2017). International Business: Competing in the global      marketplace (11th  ed.). New York, NY: McGraw Hill Education. (Print ISBN: 978-   1259578113; Digital ISBN: 978- 1259706431)