FINANCIAL TSUNAMI IN CHINA

QUESTION

1. Introduction

Financial crisis is the most recent economic issue that has affected the business environment on global level. The impact of financial crisis has affected all the aspects of the economy of a country. Since the Great Depression of 1930s, the financial tsunami between the years 2008-2012 is considered the Global Financial Crisis (GFC). Due to the financial crisis the consumer market of the United States has had drastic changes. The impact of financial crisis can be seen in the American consumer culture in a clear way. The consumer behavior of the American has experienced several alterations due to the increasing problem of financial crisis. The consequences of financial crisis are so much adverse that they have been regarded as financial tsunami among the consumers and business people. The impact of financial tsunami results in the collapse of the large-sized financial institutions. This was the complex interplay in the banking sector of the United States during the period of 2008 that caused problems related to valuation and liquidity problems.

It was in the year 2008 that the economic fortune of the world was turned upside down. The early years of financial tsunami faced the problem of inflation. This was the period when the prices of the food and oil products increased to a great level that resulted in the transfer of the wealth to a great rate from the households to the other countries that exported oil products to America and other countries of the world (Sng, Ying and Chia 2010). Due to this condition the financial institutions and other business organizations had to face the problem related to insolvency. All these conditions have triggered the great financial tsunami in the USA.

1.1Genesis of crisis

The global financial crisis was an unfortunate result of the interplay between both and factors. In macroeconomic perspective, the factors are the persistence of global imbalances, excessively accommodative monetary policy and lack of recognition of asset prices. On microeconomic level, the rapid financial innovations without any effective regulation are contribution factors for the crisis.(Mohanty 2010)

1.2 Background

In the year 2005-2006, the main cause that triggers the financial tsunami was the housing bubble of the United States. Due to the problem of financial tsunami the economic conditions of the United States have been in deep trouble and there are no signs to show that the condition of the US would improve soon. The major causes of financial tsunami that have been explored are the continuous fiscal irresponsibility since decades as a result of increased degree of spending, tax policies in the irrational and inconsistent manner, increment in the number of entitlement programs, high degree of interference of the government in the free markets, and follow up of accounting practices in an inappropriate manner. The financial tsunami has put US economy in the threat of high debt. There is no effective action by the American government to deal with this increasing problem. The problem of financial crisis can not be ignored now because it has been affecting the governmental problems and other issues to a greater degree. The financial tsunami grew in the United States since at least second half of the year 2007 and in the year 2008 it reached its peak state (Forbes 2009). All the financial markets, institutes and almost all the business organization have undergone a great economic pressure since the year 2008 due to it.

To fight against GFC, governments and central banks declared fiscal stimulus, expansion of monetary policies and institutional bailouts. The possible steps were taken to reduce the risks of deepening financial crisis and global recession, lest it should become another great depression. The intervention of the governments resists the financial and economic crisis in the country. It also governs the effective regulatory policies of financial institutions and ensures the economic stability.

In the earlier stage of the crisis, there was a decline in liquidity and profitability in the United States and to some extent in Western Europe. Later, the financial market indicated the steep rise in the corporate solvency risk, after the collapse of Lehman Brothers in

In September 2008, the major economies such as the United States, Japan and Germany, took some initial steps for strengthening their financial status, lowering the fiscal deficits and reducing public debt levels. Such steps were recommended the expanding money supplies to refrain from the `deflationary spiral’ risk that means lowering wages and increasing unemployment.  Moreover, governments enacted and announced fiscal stimulus packages to overcome the worst crisis. (World Economic Outlook 2009)

1.3 Purpose of the essay

The main purpose of this essay is to explore the problem of financial crisis, its occurrence as well as its impact on the consumer culture of the American people. The essay is mainly focusing on acknowledging the readers about the problem of the financial tsunami. It first provides brief introduction of financial tsunami, its basic definition, and the origin, events and reflections related to financial tsunami. Then it goes on to discuss the role of the American consumers played during the period of financial tsunami by exploring the status of American consumer culture, the consumption concept, consumer behavior and consumer characteristics. Also, the impact of financial tsunami on the society including the American economy, Chinese economy and the world economy is analyzed. At the end of the paper the practical significance of this essay is evaluated in order to show in which fields this essay can be significant and provide useful information to make improvement.

1.4 Summary of the three topics

In the following essay, three main topics are taken under consideration. These topics are mainly financial tsunami, role of American consumer in financial tsunami and influence of financial tsunami on the society. All these issues are collectively making the main content of this essay. In this section of the essay a brief summary of all these three topics is included to provide a direct idea about what is discussed in the essay. In relation to the first topic of financial tsunami, it has been evaluated that origin of financial tsunami is not much recent but from when the United States is affected by the financial crisis, but it came into light in real way at the end of the year 2007. In the later years the negative impact of financial crisis was increased to high extent that the whole world was affected. The financial tsunami even gave rise to the several critical events at the global level that can be considered as the most critical incidents in the history of the world. The other topic discussed in the paper is the impact of financial tsunami over the American consumers. This has been explored in the paper that American consumers are highly affected with the negative consequences of global financial crisis. The American consumers have to make significant reduction in their buying capacity in order to keep the economic problems to low level. Due to the financial crisis the economy policies of the government and financial institutions have become highly strict and thus the customers faced direct impact of these changes. The third topic discussed in the paper is the influence of global financial tsunami over the different economies of the world such as America, China and Africa who have experienced the most drastic impact of financial tsunami.

2. Financial Tsunami

Financial Tsunami has shaken the financial stability at global level. Due to the problem of financial tsunami, America has been facing the problem of economic crisis on a growing level. Financial crisis has put America on the verge of disaster. ,forced it to face a massive infusion in its capital, and engulfed the financial institutions, banking institutions, and the business organizations. Due to the adverse impact of financial tsunami on these entities the American consumers are indirectly affected by the adverse impacts of financial tsunami.

2.1 The origin of Financial Tsunami

The great financial tsunami originated in the United States in the summer of the year 2007. Later this problem spread on the global level in all the developed countries (Sng, Ying and Chia 2010). During this period, there were severe economic problems in the United Sates such as high surplus of homes in the American market and moderate fall in the prices of the houses. The payments on monthly basis and downfall in the prices of the houses and incapability to have refinanced of the mortgage were the main problem (Farrell 2008). The economic crisis that started in America later proved as a downturn all over the world in the form of financial tsunami (Storm Warning: Financial Tsunami Heading This Way 2012).  The speculation of this crisis was mainly initiated in the United States but later its spread in the form of financial Tsunami all over the world. The tidal waves of this tsunami passed all over the world. The impact of this financial tsunami affected the economic system at the international level. This is the result of reckless financial management in America since last 50 years. The American for nearly half a century trusted that the leaders are keeping full safeguard of their financial future (Vari 2011).

2.2 Important events

A number of different important events took place during the period of financial crisis , which shaded some significant impact over the internal economy and business patterns. Some important events during the period were:

(1) Bankruptcy of Lehman Brothers: Bankruptcy filing by USA’s fourth largest investment bank namely Lehman brothers was the prime event that took place during the crisis. Subprime mortgage crisis struck the profitability and liquidity of the firm so much that in September 2008, the company had to file a petition for bankruptcy. This was the major event during the period that reflected the severity of the crisis for the very first time (Hetzel 2012).

(2) Acquisition of Merrill Lynch: Another important event during the period was the Acquisition of a famous investment bank of the country namely Merrill Lynch by The Bank of America. The American company was affected quite badly due to the harmful impact of financial crisis in the country. At the peak of recession, on 14 September, 2008 the bank of America acquired the company for $38.25 billion stoke (Brezina 2011).

(3)  Money Market Guarantee Program by US treasury: for the purpose of providing some relief to investors and companies from the adverse impact of financial crisis, 2008, The US treasury announced the Money Market Guarantee Program in late 2008. In this program, the US treasury decided to keep watch over fluctuations in the money market of the country. In this program, the president of the US and secretary has announced for making the fund available up to $50 billion for prevention of any economic downturn in future (LaBonte 2009).

2.3 Reflections

On the basis of the review of above sections it can be reflected that financial crisis in the year 2008 was as destructive as Tsunami. This financial crisis has thrown some significant impact over the international economy. It has also attacked on the sustainability of a number of different leading business organizations in the market. The bankruptcy of large investment banks like Lehman brothers, and acquisition of Merrill Lynch are the prominent examples of the severity of this financial Tsunami. The crisis has also opened up different pitfalls in the norms of different large business organization. Along with this, the crisis was also a significant matter of concern for the government of country. A number of policies and announcements were done by the government of the country to provide some relaxations to the suffering business organization. The announcement of the commencement of Money Market Guarantee Program (MMGP) and different grants and exemptions by the government of the country provided to different business organizations are some of crucial steps undertaken by the government of the country for addressing this major problem. In addition to the financial impacts, some non financial impacts like changes in the social standards and lifestyle of people were also registered due to financial crisis (Solomon 2009). In this way because of different harmful and destructive impacts of recent financial crisis, the crisis can be termed as Financial Tsunami.

3 The role of the American consumer in the Financial Tsunami

Along with the business and finance sector, the financial Tsunami has also highlighted the role of consumers of the developed countries Like USA. The impact of Financial Tsunami over the American Consumer can be studied under different headings as follows:

3.1 American consumer culture

The consumer culture within the country has undergone a number of different changes after the failure of different large scale business organizations due to financial crisis. The prime changes in consumer culture have been registered in terms of the inclusion of more steps and critical thinking in undertaking any decision regarding the purchasing. After the crisis, the consumer culture that includes demand and consumption patterns in the market, behavior of consumers and purchasing decision making, different internal and external characteristics of consumers, and general approach of the companies for fulfilling the demands and needs of customers, has been changed in the most significant manner. Especially in the market of America, which has been exposed to the financial Tsunami the most, a significant change in the consumer culture can also be cited in the most effective manner.

3.2 Consumption concept

The consumption concepts in USA has changed in the most effective manner. In this context, the consumption pattern is shifted from high consumption to low consumption. Customers’ consumption pattern is in direct proportion to their income. As during the recession a negative growth was recorded in the average income of individual in the country, the consumption pattern was also negatively affected during the recession period ((De Mooij 2010).

In addition to this, the degradation of public budget in the time of recession due to fall in the tax revenues of the government resulted in the reduction of the public expenditure and salaries and wages. In addition to this, increasing employment rate with the country during the period of global recession is also an utmost factor that has changed the consumption of different goods in the most crucial manner during the recession.

The consumption rate of different luxurious things during the period was hampered in the most crucial manner. The most significant change was registered in the consumption pattern of stokes and other financial products. The customers of the country became quite choosy and risk averse regarding the selection of the financial product for purchasing. There was a significant slump in the rate of consumption of such different types of different financial products including stokes, shares, bonds and other long bills and coupons. In addition to this, different consumer needs and wants investment in stocks, purchases different expensive tour packages, and upgraded technological equipment has also changed quite a lot. There was no any significant change in the consumption of essential goods registered during the period of financial crisis (Taylor and Weerapana 2009).

In this way, the consumption concept prevailing in the market of the USA that used to promote free consumption of goods has changed after the crisis and started to put more focus upon savings.

3.3 Consumer behavior

Along with consumption concept and pattern within the country, a noticeable change in the consumer behavior and their buying pattern was recorded. After facing the incidents of downfall of a number of different brands and large companies across the globe during the period of recession, the level of perceived risk availed by the consumer within the country was enhanced up to a significant level (Gibbs 2009).

In addition to this, the trust and belief of the customers over big brands and companies was shattered after the crisis. This causes the increase of the complexities of purchase decision making process of the customer. In the purchasing of financial products like shares, bonds, bills, and so on, the change in consumer behavior can be seen in the most effective manner. Earlier, where the prime focus of customers used to be on maximizing returns and profits from the investment, after the crisis, they started to undertake security and risk associated with the investment as one of the prime factors in their purchasing decisions.

In addition to this, the perception of people regarding their investment avenues has also been changed significantly after the crisis. People started to consider investment in the tangible assets like land, gold and other commodities more beneficial, in comparison of the investment in different intangible assets like bonds, share and so on. The lack of confidence over the performance of different companies was the prime reason behind this. Fall in the willingness to invest was the major change in the consumer behavior in the context of the USA (De Mooij 2010).

Along with this, the spending habits of American Consumers regarding non essential things were decreased with decreasing income level. The steps and considerations in the purchasing decision was enhanced up significantly after the crisis (Hermann 2009).

In this way, after the financial Tsunami, consumers of the USA became more sophisticated and concerned in terms of their purchasing behavior.

3.4 Consumer characteristics

Some significant changes in the characteristics of consumers were registered after the incidents of financial crisis in the market. The consumers of the country became more concerned about the perceived risks in their purchasing decisions. They tended to seek more information before purchasing to reduce the risk in their purchasing decision. In addition to this, the income level as well as purchasing power of consumer was also decreased during the financial recession. They have started to be more demanding and concerned about the value they are getting from the product. Also, they became more attentive towards the quick service delivery. The level of brand loyalty pursued by the customers, after the financial downturn, was decreased as there were a number of different incidents of failure of large scale multinationals and brands during the period (Okazaki 2012).

4. Influences on society

The global financial crisis has influenced the global society at different levels. The main problem that the society has faced due to the issue of financial tsunami is in the economic conditions. The economic conditions of even developed nations have been affected negatively due to the adverse impact of financial tsunami. The major global societies that have been influenced to a great level are American economy, and Chinese economy. In addition to this the entire global economy has also been influenced by the critical problems of financial tsunami. The following section of the paper is exploring the influence of financial tsunami on the American economy, global economy and Chinese economy in different ways.

4.1 Influences on world economy

Due to the financial tsunami the stability of the global economy has even come to a stake (Farrell 2008). As the financial tsunami is intensifying, the mortgage defaults have become multiplied, and the entire world has come on hook. Multiple billons of dollars of debt has become a liability of the monocline insurance companies all of a sudden. It became difficult for all the banking organizations to sell some extra bonds because all the investors have been baked out of the market (Farrell 2008). The income gained by the banking institutions in the form of fee has been dried up and the banks have been facing the problem of massive capital deficiencies. The credit problems have been mounted to a great level and the banking institutions on global level have reduced their lending activities to each other and to the general customers, fearing that the loans would not be rapid due to this problem. The shockwaves are also affecting the different sectors of the global economy (Farrell 2008). The sub-prime mortgage crisis was originated in the United States but later it took the form of global financial tsunami that inflicted high degree of damages to the global economy.

Due to the financial tsunami of the year 2007-2009 and its shockwaves that is exposed to almost all the countries of the world, the global economic power has experienced highly weakening position. The world affairs are facing the problem of slipping down and the industrialized position and due to this the world economy is in the great need of arrangements related to power sharing. Some effective solutions are urgently needed for the highly complicated and far reaching economic issues (Savona, Kirton and Oldani 2011).

4.2 Influences on American economy

The American economy has been greatly affected by the financial tsunami. In America, American International Group, the largest insurance company in the world has faced a great loss due to mortgage crisis amounted to $5 billion (Farrell 2008). The American economy has become highly weakened due to the adverse impacts of financial tsunami such as credit crunch, collapse of housing market, increasing prices of the energy products and increasing inflation rate and its related threats. In American there is a great threat to the banking and financial institutions that financial tsunami would engulf them to a great level. The government of America has been taking some emergency measures such as development of the stimulus plans, freezing the interest rates and providing rebate to the customers in tax so that the stage of total collapse of American economy can be avoided to a significant level (Farrell 2008).

Meanwhile, the banking institutions of America have been forced to look towards the other nations for meeting out their capital requirements. For instance, the banks of the United States have gained infusion of capital on massive level from the sources of Middle East and Asia which purchased a large number of stakes in largest bank institutions of America (Farrell 2008).  Due to the adverse impact of financial tsunami, the United States has faced both financial and economic losses, degeneration of its massive liquidity crisis and credit crunch. The downfall in the US economy has even impacts the financial condition of the global economy to greater level. The proportion of the US economy in the overall economic development of the world has also been reduced to some level as the financial tsunami has decreased the magnitude of the earning of the banking and other financial institutions (Kim and McKenzie 2010). The overall analysis of the financial tsunami and its impact on American economy shows that the country has come under a very critical situation.

4.3 Influences on Chinese economy

It is evident from the macroeconomic data of the year 2008 that, due to the financial tsunami the economy of China was also affected to some extent. As an impact of financial tsunami the rate of economic growth of China was slowed down, resulting in the high decrease in the volume of import and export activities (Forrest and Yip 2011). In China the housing prices were declined to a great rate, the investment of the people in the real estate was also decreased and other economic activities were also slowed down. The growth of GDP in China was also affected, which symbolized that the financial tsunami had a negative impact on the macroeconomic conditions of China. The growth rate in the economy of China fell from 11% to 8%, about 3% of decline in the overall GDP. These worsen economic conditions of China were only the result of financial tsunami because it shrank the trade in terms of export and import and consequent negative impact on the economy of China. The Chinese economic structure was also transformed. Due to the financial crisis, China experienced a severe depression (Forrest and Yip 2011).

In the starting phases of global financial tsunami, China became unable to be decoupled from the negative impact on its economic conditions. It is confronted with a problem of establishing balance between internal and external balances. China is in great need of taking measures of capital control. The global financial tsunami has highly deepened the economic conditions of China. China wants to escape its real economy from the severe external impact of the global financial crisis (Zhang and Stening 2010). The quarterly GDP of China has reduced to a great level in each quarter from the year 2007 to 2009. From the analysis of the given figure it has been observed that during the first quarter of 2007 the growth of GDP of China was 11.1%, followed by a light increase in the second quarter, but later in all the consecutive quarters the GDP of China only faced downfall (Zheng and Tong 2010). And the data shows that in the last quarter of the year 2009 the GDP of China was recorded on 6.1%. This trend of declined GDP has shown that the global financial tsunami has greatly affected the economic condition of China (Zheng and Tong 2010).

4.4 Influences on Africa and emerging economies

The effect on African countries will spread on all countries and cause slump in their growth. The effect on Africa was at a time when there was in peace process, reduction in armed conflicts and improvement in governance and economies. The contagion impact of crisis has rippled to the poorest county of the Africa. The crisis is really a setback for African counties. The effect decline in economic growth will be more pronounced in states like Angola, Botswana, South Africa and Sudan. (African union Commission 2009)

5. Practical significance

The discussion made in the essay in relation to the problem of financial tsunami and its impact on the world economy as well as its impact of the consumer behavior of American consumers is very much significant for the government of the different countries of the world to make significant changes in their economic policies and other business related aspects in order to meet out the specific business process. The business organizations can have a good understanding at the global level about the drastic problems that have been faced by them in their economic conditions as well as overall survival degree. The analysis of the financial tsunami in relation to its origin as well as its related event is quite significant to show the major reasons. The events specified related to global financial crisis are quite effective to prove that what kinds of problems were faced on global level.

The essay is also focusing on the impact of the global financial tsunami on the consumer behavior and practices of America. This has been explored in the discussion that the global financial tsunami has greatly affected the American economy. In America, the consumers have changed their buying behavior to a great level as an impact of global financial crisis. Their spending volume has decreased as the burden of tax and other economic activities has increased on them to a greater extent. With the discussion made in relation to the consumer behavior and its related aspects, all the American companies can make required changes in their business process in order to make the customers feel comfortable even in the problematic economic era. The essay has also focused on the influence of financial tsunami over the world as well as on the economy of America and China which are the major economies of the world. The analysis of their economic conditions related to global financial tsunami has made it very much clear that the government of these two economies need to make significant changes in their economic and financial policies to keep the future economic situation on stable level. Overall the study made in this paper is quite significant for making significant improvement in the world economy through assisting it to escape from this economic crisis.

6 Conclusion

This paper mainly focuses on one of the most critical economic issues faced at the global level, the financial tsunami. Financial tsunami was originated in the United States, but later it spread all over the world and affected each aspect of life including the business people as well as the general people. The financial tsunami took place in the form of economic crisis beginning at the end of the year 2007, and it reached to its full extent in the year 2008. The negative impact of the financial tsunami not only affected the economic conditions of the United States, but also affected the other economies of the world on the equal level. Due to the widespread impact of financial tsunami on the world economy, the business people had to make changes in their business activities. This directly affected the consumer behavior and its related patterns at the global level. The most observant changes were experienced among the American consumers. Their purchasing power as well as consumption patterns faced significant changes. From the analysis of the impact of financial tsunami on the economy of the US and China as well as the world, it has been concluded that most drastic impact of financial tsunami has been experienced in America. In addition to this, China has also faced critical economic problems due to the negative consequences of global financial tsunami.

SOLUTION

Financial Tsunami

Almost a half decade back, the entire world economy and financial systems were shaken by a sedate global financial crisis. The extent of austerity of the crisis was not less than the World War II (Anon., 2008). The burden and perplexity of that financial crisis is still felt in every economy.

The biggest factor responsible for the financial crisis was the economic policies at macro level in America and other countries. In addition, a pile of forex reserves by numerous countries also led to a disturbance in the adjustment process that takes place internationally. Housing boom in US and other parts of the world was the outcome of this improper management of fiscal sources. Along with housing boom, worldwide credit boom led to the rise in prices of equities. Lack of proper invigilation and control of financial sector fuelled this crisis and instead of providing assistance in putting a brake on this financial crisis it made it more badly to handle and severe (IMF, 2008).

Financial Tsunami has not only impacted the businesses and financial sector, but has brought a major shift in the consumer behaviour as well. In America, consumers are more cautious and selective while taking any purchasing decision. They now look for value for their money while spending on any product. The confidence which consumer used to have on big brands has gone missing after this financial crisis.

Though the whole global economy has been impacted by this financial crisis, but American and Chinese economy have suffered the most. In US, American Insurance Group, the largest insurance company of the world had to face a loss of $5 billion because of mortgage crisis. Similarly, in China industrial growth fell to all time high on the back of the financial tsunami. In other parts of the world, entire banking system came to a standstill because of the credit boom and all the investment avenues came on hook.

The most important lesson which this crisis has taught us all is that everyone, be it an individual or an organisation or an economy; everyone should be prepared for the worse. In future, countries should take initiatives to frame policies that comprise of countercyclical strategies, which will help them to confront the unavoidable global crises of the future (IMF, 2009b).

Understanding and inhibiting the correct lessons is the key for the policy makers. They should be crystal clear while framing the policies and should set an example for the future.

References

Bank of England. 2008. Financial Stability Report, no. 24 (October). London: Bank of England.

IMF (International Monetary Fund). 2007. World Economic Outlook (April). Washington: International Monetary Fund.

IMF (International Monetary Fund). 2008. World Economic Outlook (April). Washington: International Monetary Fund.

IMF (International Monetary Fund). 2009a. Western Hemisphere Regional Economic Outlook (May). Washington: International Monetary Fund.

IMF (International Monetary Fund). 2009b. World Economic Outlook (April). Washington: International Monetary Fund.

KG65

But you can order it from our service and receive complete high-quality custom paper.  Our service offers Economics  essay sample that was written by professional writer. If you like one, you have an opportunity to buy a similar paper. Any of the academic papers will be written from scratch, according to all customers’ specifications, expectations and highest standards.”

Please  Click on the  below links to Chat Now  or fill the Order Form !