Since half a decade ago, the global economy entered the financial crisis. The impact of the economic downturn was severe, and most countries took years to recover from its effects. The globe was unaware of the consequences initially, but the extent of the crisis was huge, and economists took time to understand its depth. A few countries came out of the crisis, and most countries struggled a lot for their survival. The global crisis has taught us many important lessons, but the crucial aspect is financial crisis management.
Causes of the Global Financial Crisis
Although there is no clear explanation of the economic crisis, from where it started and what factors resulted in the crisis, four elements are considered the root causes of the financial downturn. These include macroeconomic policies, financial engineering, financial sector regulations, and large private financial institutional activities across the globe. The context for each element was different in several states. However, different countries adopt varying strategies for financial crisis management.
In the United States, fiscal policy reduced saving rates, while monetary policy wasn’t a leading factor in the US economic downturn. In Japan, both fiscal and monetary policies led towards the distortion of the financial system. The foreign exchange reserves accumulations distorted the whole financial adjustments at the international level. This resulted in housing booms not only in the US but all over the world. Along with the housing booms, credit booms are also raised in different states.
Lessons from the Global Financial Crisis
Management of Personal Debt
One of the major lessons that the global economic downturn taught us was the effective management of personal debts. The crisis made a huge volume of people decrease their debts. The debt rate was reduced to a considerable extent.
Decreased Household Debts
The sudden financial crisis resulted in the sizeable payment of household debts. It was a significant outcome of the global crisis for most households. The process of financial crisis management became better with it.
Influence on Younger Generations
During recession times, teenagers were less likely to be attracted by the luxury things such as branded cars, clothes, houses, and vacation package. Their belief was to earn a huge amount of money and secure their job. The crisis made competition tough for the younger generations, as it was difficult to own a house. Along with the financial crisis management, the situation made people more cautious than before.
Increased Concern for People and Environment
The financial crisis allowed people to be more concerned about the future generation and environmental sustainability. People became more accountable towards energy conservation and consumption. The economic downturn turned out to be more fruitful for the environment and societal development.
Consumer Financial Protection Bureau
The United States signed the Consumer Protection Act and Dodd-Frank Wall Street Reform to prevent a similar economic downturn in the future. Financial Stability Oversight Council and Consumer Financial Protection Bureau were established as monitoring bodies that help financial crisis management.
Bank Stress Tests
The stress tests conducted by the federal government played a leading role in reducing the worst lending habits and risky behaviors. This helped banks in making their operations sustainable and protected from risks.
Wall Street as the Less Dominant Part of the Economy
The crisis resulted in the decreased role of Wall Street and increased technological advancement in the financial sector. Due to this change, most economies suffered for a longer period as compared to others.
Creativity
The financial downturn resulted in the successful launch of innovative and creative spaces in certain industries. New businesses emerged with a focus on consumer behavior and profit maximization.
The global economic downturn left a huge impact on most states and taught us the effective strategies of financial crisis management that can help us prevent future recessions.
