Impact of Global Financial Crisis Towards Malaysia

Introduction

Global Financial Crisis of 2008 can also be known as Financial Crisis of 2007-08 and 2008 Financial Crisis. Many economists considered it was the worst, largest and most severe financial event since the Great Depression of the 1930s.  Global financial crisis 2008 was brewing for a while and really started to show its effects in the middle of 2007 and into 2008. In the early of 2006, the mortgage default rate of the subprime mortgage getting higher in US. Then, it leads the US housing price to fall after nearly a decade of exceptionally high growth. The primary course of wealth that Americans hold become increasingly devalued and cause a liquidity crisis when US. Investors loss their confidence in the value of subprime mortgage. US Federal Bank came into to solve the problem by injecting a large amount of capital into financial markets. The default rate is getting higher each year until the prime mortgage markets were showing higher than normal default rates by late 2007.

        Collateralized Mortgage Obligations (CMOs), a type of mortgage-backed security issued by investment banks and other financial institution in which principal repayments are organized according to their maturities and into different classes based on risk. It allowed these problems to spread from mortgage market to other sectors of economy, which having a widespread effects on financial markets as a whole. There is relationship between mortgage’s value, default rates and the value of these securities. As the default rates increases, value of mortgage decreases and causes the value of these securities decreases as well. Not only that, the problem became more complicated by another financial product, Credit Default Swap (CDs). It is a swap designed to transfer the credit exposure of fixed income products between parties. Investors who purchased CDs will receive credit protection, whereas sellers guarantee the credit worthiness of debt security. There is a risk transfer between holder of fixed income security and seller of swap. Financial system is dragged down due to the misuse of the CDs. Seller of CDs bought other CDs in order to protect themselves until nearly all investors and sellers were linked by these liabilities.

That time, CMOs and CDs became the “toxic assets”. Value of the corresponding CMOs collapsed due to the mortgage markets default. This lead to a significant problem to happen which there was no longer what they were worth because investors were risk averse and stop trading CMOs. The financial system that time is only based on trust between bankers and customers. No private financial institution was willing to lend money to any other due to the ability to repay the money and the existing of “toxic assets”.

        On September 2008, private lending froze completely some of the important credit markets. The liquidity problems derivative from the default in subprime mortgage in US turned to insolvency. This created problems in the real economy because non-financial businesses were unable to obtain loan to finance their business to function normally. Actually on March 2006, the real economy began to exhibit problems that related to financial crisis. The decline spread to investment and consumer spending in the early 2008. There was a sign of a recession when the consumer spending increases and Gross Domestic Product (GDP) start falling. In year 2008, the formal beginning of the recession had been dated as December 2007 by the official arbiter of business cycles from National Bureau of Economic Research. Congress came out with Troubled Asset Relief Program (TARP) to help the financial institution when the economy began to fall more than 6% annual rate. US Treasury created a group of programs by purchasing troubled companies’ assets and equity. This plan help to stabilize financial system restore economic growth and prevent foreclosures during financial crisis 2008. The effect of financial crisis and economic recession faced by US start to spread globally by the financial and trade linkages.

        Foreign banks aim for the opportunity to invest in the US mortgage market when the economic is in expansion. Examples, investment bank will issue CMOs. Investors were willing to liquidate their investments at the beginning of August 2007 due to their wealth increasingly devalued due to the devalued in value of securities and mortgage. However, it was hard to liquidate their assets because of a lack of buyers in markets that time. International bank lack of confidence in US financial institutions causes the interest rate to increase at which they issue loan to one another, known as the LIBOR. US experienced economic slowdown will decline the US imports from other countries like European Union, China and Malaysia. It causes the GDP of the other countries to fall and spreading the recession worldwide.

        Therefore, the downturn of US economy has a big impact to the world. Thus, global recession can be seeing clearly during the year of 2008. The financial crisis 2008 caused an estimated loss in trillions of U.S. dollars globally.

Causes of global financial crisis of year 2008

The financial crisis of year 2008 is the worst economic disaster since the great depression of 1929. The global financial crisis had a great impact to other country such as Malaysia, Hong Kong and so on. There are many causes that lead to global economy turn into recession and the global financial markets being collapse.

The main causes that lead the global economic turn into recession was the United Stated (U.S) banks create too much of money or it can be said that the banks were lending too much of loan to the consumers. Every time the banks want to make news loans, they will create a huge sum of new money. Liability is created to both of the borrowers and bank when the bank created new money to make loan for the customers. On the other hand, when the bank lends more loans to the consumers, the public will think that economic is doing well and they will borrow more and more. The global financial crisis 2008 happened was due to the U.S bankers created too much of money and lent it to the public for the purpose of purchasing houses.

During year 2000 to 2006, the housing prices in U.S were said to be increasing sharply during that six year. The increased of the housing prices will form a bubbles effect to the property markets of U.S because the housing prices were pushed up more quickly than the wages or salary. Thus, lending a large sums amount of money into the property market will pushes up the housing price along with the level of personal debt. This is because when borrow loan from banks, the borrower were required to pay the interest to the banks as protection for the bank because of the default risk of borrower. So with the debt rising quicker than the incomes, eventually some people were unable to keep up the repayments of the loans. At this point, when borrowers stop repaying their loans, the banks may face the situation of bankruptcy.

...