I. The 2008 financial crisis began with the collapse of the U.S. housing bubble and subprime mortgage crisis, which spread to other economies. Major financial institutions like Lehman Brothers collapsed due to bad investments in subprime mortgages. II. The crisis had wide-ranging impacts, including a global recession, falling trade and commodity prices, and reduced capital flows to developing countries. Unemployment rose sharply. III. Countries that avoided financial liberalization and maintained conservative monetary policies, like India, were less severely impacted than countries that embraced deregulation and risky financial innovations. The crisis accelerated power shifts toward emerging economies.

1. Financial Crisis
2008
By
Ashar Faheem
Roll No.
32
Submitted to
Sir Imran Ali

2. Financial Crisis
Financial crisis results from the implosion of asset price bubbles (or from the sharp
depreciation of national currencies) (A bubble; a non-sustainable pattern of price
changes or cash flows) Bubbles are generally associated with a robust, prolong
economic expansion : manias associated with growth euphoria rational behavior
morphs into irrational exuberance A certain event, perhaps a change in government
policy, an unexplained failure of a firm/bank previously thought to have been successful
leads to bursting of the bubble. Bubbles always implore, but this does not always lead to
a crisis (a soft landing is possible) – depends very much on the money and capital
market institutions of the time.
On February 7, 2007 one of the world’s largest banks, HSBC, announced losses related
to U.S. subprime mortgage loans. A couple of months later, on April 3, New Century
Financial, a subprime specialist, Bear Stearns told an incredulous financial community
that two of its hedge funds suffered large losses related to subprime mortgages.
Other Wall Street standard-bearers also started reeling from bad investments, before
the end of August the crisis had spread to some French and German banks, and
prompted the Federal Reserve and the European Central Bank to pump liquidity into the
banking system and to reconsider their interstate policies.
Cause of the crisis
Financial institutions to grant housing loans largely on the one hand, and increased the
percentage of loans to the value of the property (housing) on the other. Has provided
financial institutions such loans to a large number of consumers.
Owners credit bad in the sense that their willingness and ability to repay loans is low
and thus stumble upon solutions dates of repayment of loans, which affects the
development of financial institutions that granted loans, and then not being able to fulfill
their obligations and collapse.
There is a particular property is characterized by financial and banking institutions a
large degree of overlap between them.
On the other hand, there are other characteristic features of the financial sector is that
when the collapse of the financial institution because of a bad situation affects this affect
to another financial institutions depositors.
Which the financial position of the most good. Launched the start of the new crisis with
the announcement of a giant financial institution, is the Lehman Brothers' bankruptcy for
a symbolic beginning of the dangerous, because of this great institution was one of the
few companies that survived the massacre of the Great Depression in1929.

3. Impact of Crisis:
 For many developing countries, the U.S. credit crisis will mean slower growth and
rising inequality. The effects will be protracted. And the nature and degree of
impact will vary widely.
 Some countries, notably those with extensive foreign exchange reserves and
strong fiscal positions, will be much better able to cope than others. But overall
the crisis is very bad news for developing countries and especially for the poor.
 Impacts felt through two channels. First, lower growth in the industrial countries
will mean less demand for developing countries’ exports, both manufactured
goods and most commodities (gold will be a notable exception). A few
developing countries are growing based on domestic demand but many are
growing based on exports, and for them sagging rich-world demand will be a
problem.
 The second channel is reduction in capital inflows to developing countries.
Because the U.S. crisis has created a global credit crunch, investors are
becoming more risk averse and thus less willing to invest in developing countries.
As uncertainty and risk have increased in international capital markets, investors
will continue to shift the composition of their portfolios, away from riskier assets,
such as emerging markets securities, and into traditional stores of value, such as
U.S. treasury bonds and gold.
I. A crisis of liquidity in global financial markets.
II. Reduced demand for raw materials and especially the oil resulting in a lower
price.
III. Bankruptcy a large number of major international companies in several areas
linked.
There were already indications that the crisis will possibly encourage more internally
centered economic growth in China, India, Russia and the rest of the emerging
economies, strengthening domestic markets, but hence reducing their contribution to
world trade during the crisis
As a result of the deepening of the global economic crisis, social inequality increased,
but inequality of incomes between workers in the developed economies and the
emerging economies lessened.
The crisis was destined to bring about fundamental changes in the world economic
system. In order to develop further, the world economy needs qualitative changes.
There are limits to reform in the current global economic system, but at no other time in
the last half-century have those limits seemed more flexible.
As a result of the serious collapse in global markets, and also because of the relative
strength of their banking sector, it is quite possible that the emerging economies will
increasingly shape the future of global finance just as they are already shaping the
direction of global trade.

4. IMPACT ON MARKETS:
The global financial crisis affected virtually all areas, including the process of
globalization. Housing prices crashed; foreclosures became commonplace;
unemployment reached 10 percent in the United States and higher levels in Europe and
elsewhere; manufacturing declined sharply, especially in the automotive industry;
students were faced with higher costs as colleges suffered financial losses; finding jobs
after college became more challenging; and a global recession created widespread
hardships. On the other hand, many developing countries that took a prudent approach
to finance and saved money were not as badly damaged. In fact, countries that did not
fully embrace financial liberalization were less affected than those that gave in to
American pressure to fully engage in financial globalization. We also saw a global
power shift, with the United States losing ground to China, India, Brazil, and other
developing countries.
HOW DID INDIA MAKE IT THROUGH?
In sharp contrast to the policies adopted by the U.S. Federal Reserve under
Chairman Alan Greenspan, the Reserve Bank of India, led by Y . V. Reddy, rejected
many financial innovations and limited the participation of foreign investors in India’s
financial system.
Instead of believing that markets are self-regulating, as many Americans do, the
Indian government favoured regulations and was quick to recognize financial bubbles.
Reddy restricted bank lending to real estate developers, increased the amount of
money banks had to set aside as reserves, and blocked the use of some derivatives.
This conservative approach enabled India to largely avoid the global financial crisis.
Linkagesto the rest of the economy:
• Housing sector boom was accompanied by a stock market boon
• New financial derivatives based on to mortgages contributed to massive expansion in
overall financial systems.
• Thus, there was a high risk of a synchronized price declines across many speculative
markets.
• ‘regulatory failure’ amplified the potential risk. - There was no regulatory reforms to
match new financial innovations
- New innovations made it hard for regulators to keep track of firms’/banks’ exposure to
credit risk.
Global Spread
• In the second half of 2007, banks and hedge funds around the world reported major
losses from sub-prime mortgages
• September 2007: Northern Rock, a major bank, was rescued by the UK government
• Widespread bank failures in the second and third quarter of 2008 in a number of
countries: UK, Belgium, Sweden, Iceland.
• In the 2nd week of October, Britain ‘nationalized’ much of its banking industry.

5. Solution of Crisis:
The U.S. government's rescue plan presented to the House of Representatives $ 700
billion and, after deliberations between rejection and acceptance was approved by the
Council of Representatives and the Senate.
•The emergence of incorporation companies (fusion) and sales of a number of big
companies to save it from bankruptcy.
Many of large central Banks provides large number of countries around the world with
billions to ease the liquidity crisis, such as the U.S. Federal Bank and Japan's central
bank and the German Central Bank.
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