Global Financial Review

1. Introduction
The global economy remains mired in a deep crisis. The IMF, which in January had forecast the global economy to grow by just 0.5 per cent in 2009, now predicts a contraction. Developed countries will see their economies shrink while developing countries will grow but in a much slower rate than what they have been used to. There is near unanimity that the world economy will not recover until the raging financial sector crisis is brought under control. The term “Global Financial Crisis” refers in the present context to a severe credit, banking, currency and trade crisis which emerged in September 2008. The crisis was triggered by sub-prime mortgage crisis of 2007-08. The crisis became manifested with the failure, merger or crash of several financial institutions, mainly in the United Sates of America (USA). The banks and the other financial institutions faced an insolvency threat. Across the globe, millions lost their jobs. The failure of large financial institutions in the US led to a global credit crisis, deflation and sharp reductions in trade - related activities. It further led to a number of European bank failures and decline in various stock indices, and large reductions in the market value of stock equities and commodities worldwide. The housing boom which had been centre - staging the global financial scene for a long time has witnessed a reversal. However, the symptoms of the financial crisis had been pointed out much earlier by some financial experts. It really started to show its effects in the middle of 2007 and into 2008. The collapse of Lehman Brothers is seen by some financial experts as the first manifestation of the staggering proportions of the crisis. It resulted in the loss of funds by other financial institutions, as the banks ceased to lend each other. A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialised economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail.

2. Beginning of the Crisis
The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Stock markets have fallen around the world, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. While on the subject of global imbalance and global economic crisis it is worth recalling the prescient observations of former RBI Governor Y. Venugopala Reddy. In an address at the Financing for Development (FFD) Office, United Nations, on May 11, 2006, he had this to say: “One wonders whether there is a dissonance between the perception of financial markets and that of policy makers in regard to global imbalances………..The policy makers appear to give some signals of concern, but the response of the financial markets is often out of alignment with the signals. Interestingly, anecdotal evidence shows that analysts in financial intermediaries are sensitive to the downside risk of imbalances but the conduct of the participants does not reflect the awareness.......... If such dissonance is true, and persists, what would be the effectiveness of public policy?” The speech was delivered 29 months before the collapse of Lehman Brothers and other institutions and the full impact of the crisis began to be felt around. The global financial crisis began to un-ravel following the emergence of the sub-prime mortgage crisis in the USA in 2007. This in turn was caused by the housing market down - turn fuelled by the availability of housing facilities more than what is necessary. As a result, many financial companies who were engaged in such type of business were closed down. Many of them were merged with larger companies. In the subsequent chapters we would describe the basic concepts related to the crisis, analyse its un - folding in a step - by - step manner and bring out its reasons, impacts and the suggested remedies.