Financial Crisis in Kazakhstan free essay sample

The late-2000s financial crisis (often called the global recession, global financial crisis or the credit crunch) is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in numerous evictions, foreclosures and prolonged unemployment. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U. S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008. The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008. The bursting of the U. S. housing bubble, which peaked in 2007, caused the values of securities tied to U. S. real estate pricing to plummet, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and mid-2009. The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, 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. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in n increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns. The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006. Already-rising default rates on subprime and adjustable rate mortgages (ARM) began to increase quickly thereafter. As banks began to give out more loans to potential home owners, housing prices began to rise. In the optimistic terms, banks would encourage home owners to take on considerably high loans in the belief they would be able to pay them back more quickly, overlooking the interest rates. Once the interest rates began to rise in mid 2007, housing prices dropped significantly. In many states like California, refinancing became increasingly difficult. As a result, the number of foreclosed homes also began to rise. Steadily decreasing interest rates backed by the U. S Federal Reserve from 1982 onward and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing construction boom and encouraging debt-financed consumption. The combination of easy credit and money inflow contributed to the United States housing bubble. Loans of various types (e. g. , mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U. S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U. S. continues to drain wealth from consumers and erodes the financial strength of banking institutions. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally. While the housing and credit bubbles built, a series of factors caused the financial system to both expand and become increasingly fragile, a process called financialization. U. S. Government policy from the 1970s onward has emphasized deregulation to encourage business, which resulted in less oversight of activities and less disclosure of information about new activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U. S. economy, but they were not subject to the same regulations. These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to provide funds to encourage lending and restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions and implemented economic stimulus programs, assuming significant additional financial commitments. Financial Crisis in Kazakhstan free essay sample It is a disaster with immense power and sometimes it is compared with a hurricane as it cannot be controlled and avoided. We are still feeling the consequences of global decline in the economy and we ask questions from ourselves â€Å"Why did it happen? † and â€Å"What were the causes for this? †. Financial Crisis made a huge impact on the economic stability of Kazakhstan. Crisis happened because people did not want to accept the bad news as their businesses, salaries, living and working conditions were becoming much better day after day.People had a miraculous hope that luxurious way of living will last forever and there will never be an explosion which happened in 2008. As we faced the crisis we could not adequately analyze the problem and were not willing to do it either. The problem of financial crisis is peoples’ flippant behavior which created a misbalance between banks and clients and government has to create a new plan to solve this problem. We will write a custom essay sample on Financial Crisis in Kazakhstan or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page There are several important dates and steps which made Kazakhstan to face this Global Problem. Also, these dates changed not only economy of the country, but peoples’ lives and destinies.We live in the world where everything is connected with other and if something happens everything will fall like house of cards. However, the roots and consequences are to be identified. Banks are trying to cope with this problem, because the biggest hit on this part of the economy. President of Kazakhstan, Nursultan Nazarbaev, gave a new order of the development of financial sector of the Republic of Kazakhstan after the crisis period to make sure that it will never happen again. Causes of Financial Crisis As it was said before, there are several things which led to a financial crisis.It is not the result of one day and not the fault of just one country. I think it would be fair to say that year by year we were putting ourselves in a situation which made favorable conditions for the crisis to come. We can start with several dates which were showing that Global Financial Crisis is knocking our doors. They are: 7th February 2007 â€Å"HSBC announces losses linked to U. S. subprime mortgages. †(Mauro F. Guille, 1st page). It means that prices for mortgages started to decline and banks could not get their money back.Moreover, banks were making tougher rules to give loans and require full documentation from people about their income. That led to a huge decrease in number of given loans and as a result the customer confidence which was an essential part in the economic circle began to slide down immensely. This is what happened in Kazakhstan, but came much later in 2008. Before this situation, the bubble of bad credit loans were becoming bigger and bigger. When it finally reached its pick, the explosion affected every industry and every part of the world.We can see the declining trend from the most popular site for Kazakhstan houses sales and rents â€Å"Krisha. kz† that the prices beginning from 2008 started to decline. I think it is obvious that the first wave that made the most impact on Kazakhstan was when Lehman Brothers, one of the biggest American Banks announced that they have an enormous loss of $4 billion for the year 2008 on the 11th September. This is when the panic in Kazakhstan started. All banks all over the world are connected with each other. Some analysts say that banks of Kazakhstan had huge debts in the foreign markets which lead to the instability of the banking system. Also, negative surpluses in trade balances could cause a crisis in our country (â€Å" ? †,3rd pgh). However, Nursultan Nazarbaev, President of the Republic of Kazakhstan says that the main cause of crisis in Kazakhstan was speculation. According to his words, â€Å"Global Financial Crisis became possible, because of the actions of speculators. They took an enormous amount of money from the stock markets and invested them into commodities markets. † (â€Å" ? †, 2nd pgh). We still cannot say with a 100% certainty that analysts or the President is right. Both of them could be right. It is just a matter of from what point do you look at the problem. The collapse of Lehman Brothers and shortage of resources made Western Banks to close some of the credit programs which were operating for the developing countries. These means that banks of Kazakhstan did not have any external funding during the times when it was essential for them. Consequently, this led to a financial instability the banking system of Kazakhstan and banks started closing credit programs. So, automobile and house markets felt the most impact. People could not get a loan from the banks to invest in new cars, houses and apartments.Banks were asking their clients to calm down, but the situation was going much worth day after day. Taking into consideration the fact that most of the purchases were financed by the loans it is not a surprise that positive forecasts of some of the bankers did not come true and the demand for consumer goods started to decline very fast(â€Å" ? †, 4th, 5th pgh). Consequences People of Kazakhstan and other countries still feel the consequences of Financial Crisis. We can see it from these major points: The growth of banking system in Kazakhstan decreased. Table #1 (The dynamics of assets of Kazakhstani Banks)