The US Sneezes,
The World Catches a Cold
Introduction
The US Sneezes, the World catches a cold. The statement sheds light on the threatening “sub-Prime Crisis” that the world is facing. This paper aims at studying how the sub prime crisis originated and what are its implications on International Finance Scenario. For many years, the US has enjoyed the dignity of being the World Power but its reign nearly has come to an end now. The greatest debacle that the world witnessed a year and a half ago was a major damage to the International Finance. Multinationals went bankrupt. Even countries declared them bankrupt. Meryl Lynch, General Motors etc are some of the big names that no more exist. In 1930, a mammoth depression sucked the world and thundered the world economy devastatingly. Though this sub-Prime Crisis or sub-prime crisis is not that much ferocious but it has hammered world economic cycle to a great extent.
Origin- the US sneezes
Home loans came out to be a prominent reason of the sub-Prime Crisis or sub-prime crisis. In the early era of the decade prices of the houses in US were increasing and it remained high till 2006. At that time the rates of borrowing and lending were very low. Thus demand and supply of the new houses soared. Taking advantage of the situation, many institutions gave loans to borrowers which lacked any consolidated money background. This created heavy sub-prime mortgages. As a result many investment banks and possessors of hedge fund wanted to take advantage of the opportunity. When we had a look in the past, Federal Reserve; the central bank of the US implemented a cycle of increasing interest rates that in turn raised the borrowing expense from the lowest levels registered since the 1950. It was in June 1950. In June 2006, after many increases in interest rates, the value become 5.25 % .US housing market started falling in August 2005 and remained there in 2006 also. Thus the cost of building and prices of housing fell down. This allured people who were willing to invest money and ones who also wanted to make business with housing and thus many holders of the sub-prime mortgages made mistakes in giving loans out if greediness and the first glimpse of crisis were seen in March 2007, when new Century Financial feared the fact of getting bankrupt.
The World catches a Cold
From Europe to Australia, Asia to America, the people from each and every part of world currently are facing the vivid collapse in the global financial market. The Investment market, the corporate world, the commercial banking sectors, or the tourism industries are not the only sectors greatly suffering through this biggest traumatizing threat. The shattering effects of this Financial Meltdown are felt at consumers, the driving force of Economy. Known more commonly as ‘The Deep Sub-Prime Crisis – 2008/09’ or ‘The Great Sub-Prime Crisis – 2008/09’, this market crisis has emerged as the most recent as well as captivating challenge not only for the Economists but also for the corporate bosses. Some of the severe outcomes of this threatening situation felt are:
- Banks undergoing huge losses, some to the extent of bankruptcy .
- Massive increase in the prices of commodity and assets followed by deflation
- Increased Prices of Petroleum Fuels and oil products, Food Products etc.
- Real Estate bubbling
- Outsourcing and contracting work in place of Hiring of employees
- Unemployment growth due to job cut downs
- Temporary Holds on business Expansions
- Affected payment capabilities of corporate firms
Sub-Prime Crisis is qualitatively the downturns of the GDPs of the nations around the globe. One of the commonly accepted definitions of Sub-Prime Crisis is that it is the situation where the GNPs of the nations have gone down for more than two consecutive financial quarters while the other definition goes like the periods where the GDPs of nations for a year experience a decrease of more than 3% and so on. The situation aroused from the collapsing of some of the large US banks and financial institutions in late 2007. But it has hit every street and corner across the globe. Business confidence is degrading. Commercial as well as the Investment bankers are fleeing.
Surveys and the reports produced by the World Bank state that this crisis is likely to affect the developing countries the most. The economic growth of the countries depends on the trade. But the world trade is expected to fall at the fastest rate during this period. The bank has also estimated a necessary repay of approximately 3 trillion dollars in public and private loans in developing nations. The developed and rich countries are believed to borrow largely in world credit markets to finance trades. The countries having sufficient reserves of foreign currency need not to worry, but others may have to struggle to pay their existing debts. The intimidating effects are felt directly or indirectly by almost everyone in all sectors. All the people have been infected by the sub-Prime Crisis. Be it a local or small-scale business, or large corporations and companies, or be it the individual families or societies, all are suffering from the impacts of this financial disaster.
Sub-Prime Crisis has expanded from the global to the domestic dimension. Many countries are now showing keen interests in the financial markets of other countries, and are also making investments on a global scale. Along with multinational organizations, other business enterprises are also being the part of global economic competition. Corporate bosses and business executives are now trying to sustain and recruit the best people to run their ventures. Experts of human resources are now fighting a ‘war for talent’. Business leaders are giving halts to the plans of business expansions and saying that the governments should aid to reduce the unemployment and guide the youth to decide their future. This unfortunate economic disaster is also generating a lot of fear and anxiety among a growing number of youths all over the world who have serious questions about the adverse economic state of their country. Many countries have noticed the prevailing of pessimism among the youth talents.
In such a scenario, world is in search of great leaders who can counterfeit this turbulence and stabilize the markets with their effective leadership quality. Whole of the world is dependent on the strategies that these leaders will adopt because that will only decide the flawless flow of trade between countries. For example at global scale if we talk, People all around the world have an eye on Mr. Obama, the President of United States. US is considered to be the origin of Sub-Prime Crisis and thus people wants Mr. President to enact some policies and strategies that will help out the world to get rid of this sub-Prime Crisis. At local scale, managers or leaders have to adopt effective way of leaderships to give their firms a strengthened base to survive from this great sub-Prime Crisis. In this report we will emphasize on Quality Management. It is very difficult for the leadership to manage quality in times of such global turmoil and crisis. It is equally difficult to remain competitive. These unprecedented situations require unprecedented response from the leadership. The quality management issues cannot be just confined to managing quality of product or services. Rather, it requires a full fledged response from the leadership in maintaining quality on all fronts.
Some Realistic impacts of the US sneeze
- Mr. King, deputy governor Bank of England admitted that UK was previously in a deep sub-Prime Crisis. Major Banks have changed their strategies and are putting more emphasis on short term plans. He forecasted that economic growth would fall below 4 per cent during 2009 . Companies are not taking projects seeking heavy investment and are concentrating on present clients only. All the big companies in UAE and India have adopted the policy of concentrating on existing clients like Emaar, Etislat, Du, SONY and SBI in India.
- According to Nelson D. Schwartz, global job losses from this sub-Prime Crisis that originated in the United States in last quarter of 2007 could hit an astounding fifty millions by the end of financial year 2009 , as according to the an agency of United Nations :”International Labor Organization”. The deceleration has already argued over 3.6 million American jobs. If there is something that has impacted sub-Prime Crisis is not boorish way than it is retailing sector which relies a lot on expansion. Recently two of India’s retailing giants namely “Reliance-Fresh” and “Subhiksha” nearly went bankrupt due to lack of liquidity in market. Surprisingly against the trends, UK’s as food giant “KFC” has offered 7000 new jobs as a basic requirement for its expansion plan. This can be treated in two ways. KFC’s limitations to expand in order to survive or can be considered as a step to exploit the opportunity .
- Vice president of JK Tyres stated that this kind of financial crises is a result of long term financial ups and downs. He stated that these kinds of capital problems often occurs in 72 years but are of limited impact. After a total of six of these smaller waves comes a bigger one like the great depression of 1927 and its little boy we are facing today.
Conclusion
One can say that it’s very correct that the present slowdown is one of the worst which the industrialized mankind had ever faced. Jobs are cutting, salaries are lowering, and pillars of capital industry are losing hope but it’s not a curse rather a lesson for promoters of blind industrialization. Agencies, leaders of capital empires and developed economies share the responsibility to overcome this threat. As this time has provided an opportunity for lot of aspirants too, referring it as a demon is a matter of perspective. People should always learn from the pitfalls and from sub-Prime Crisis industrialists must have got this message. They should not perform business beyond their capital and should always check on quality issues.
References
- Barnes R (2007) The Fuel That Fed The Subprime Meltdown. Retrieved 30 Dec 2007 from http://www.investopedia.com/articles/07/subprime-overview.asp
- Ghosh DMG (2007) Understanding sub-prime crisis. Retrieved 30 Dec 2007 from http://www.blonnet.com/mentor/2007/08/27/stories/2007082750291300.htm
- Prins N (2007) The Sub-Prime Market Crisis. Retrieved 30 Dec 2007 from http://www.solidarity-us.org/node/1171