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Posted on September 30th, 2012, by

The economic recession produces an extremely negative impact on international financial markets and financial services. In this respect, it should be said that the modern financial markets as well as economy at large are closely integrated and interdependent. This is the result of the process of globalization which stimulates the economic integration and cooperation between countries, eliminates fiscal barriers and encourages international free trade. On the other hand, globalization has a negative side-effect, which has become obvious recently due to the economic recession which started in the USA and spread worldwide. In such a situation, global financial markets could remain unaffected by the economic recession. In fact, the economic recession affected macroeconomic development of the US and other countries of the world, including currency rate, inflation, unemployment level, etc. As a result, negative macroeconomic changes undermined the stability of financial markets and provoked the crisis of financial services in global terms.

On analyzing effects of the economic recession on the global financial services, it is primarily necessary to dwell upon the origin of the economic crisis and its development that can help to better understand the essence of current financial problems. First of all, it should be pointed out that the deterioration of the economic situation in the US can and does affect substantially the world economy and global financial markets. The modern economy and financial markets are closely intertwined. The process of globalization stimulates economic development and growth in different parts of the world, while, on the other hand, it makes countries extremely dependable on the situation in foreign markets and vulnerable to economic recession and crisis, such as the one that started in the USA and expanded worldwide.. In such a situation, the current recession of the American economy produces a negative impact on the development of the world economy and global financial markets at large and some countries in particular (see Table 1). Naturally, the US is the country, which is the most affected by the economic recession. This is why it is extremely important to analyze the currents situation in the US economy and find out major causes of the economic recession, its effects and possible perspectives of the further development of the US economy.

In fact, the role of the home mortgage crisis can hardly be underestimated because this crisis practically undermined the stable functioning and development of the US economy. It should be said the decrease of the housing market in the US could be observed since 2005 that naturally could be viewed as a direct indication to the upcoming crisis of the market as well as the deterioration of the economic situation at large, crisis in the financial market of the US and, as a result, the slowdown of the economic growth which outflow into the economic recession that could be observed nowadays in the US. However, it is necessary to underline that specialists (Williams) lay emphasis on the fact that the housing market of the US is not in the freefall. In fact by 2007 and till the present moment the situation in the housing market is relatively stabilized, but the problem is that the current housing market suffers from a substantial fall that has occurred since 2005. At the present moment, the housing market is really in a very difficult position and, what is more important, it does not really demonstrate positive trends to the growth, while it is one of the major priorities of the US economy to revive the housing market and return its financial dynamic, at least, to the past level that existed a couple of years ago. In such a way, the overcoming of the crisis in the housing market can open the way for the activation of the American economy at large, its stabilization and ongoing growth.

In this respect, it should be said that the mortgage crisis in the USA provoked a profound financial crisis in the country, which influenced foreign financial markets as well. In such a situation, the financial instability increased uncertainty of specialists in the further development of financial markets and financial services faced a serious problem of the retardation of the development of financial markets worldwide and decrease of financial activities. At the same time, international financial markets suffered from the dramatic changes in the price of products which are strategically important for all countries of the world, such as oil.

The growing oil prices also produced a negative impact on the economic development of the US and contributed consistently to the current economic recession in the country affecting dramatically the situation in global financial markets. In fact, the oil prices have already hit the ceiling and reached the unprecedented peak of 100 USD/b. Obviously, in such a situation, it is very difficult to maintain a high level of the economic growth because the consumption of energy, which naturally means the consumption of oil and its products, at least remains stable or even growth, while the growing oil prices make the costs of production consistently higher. Taking into consideration the weakening currency rate of the US dollar, it should be said that the situation is absolutely unfavorable for the US economy. It proves beyond a doubt that the US economy has to overcome the current crisis and minimize the negative effect of the growing oil prices.

In this respect, it should be said that the growing oil prices and the weakening of the US dollar have caused another serious problem the high inflation rate, which has reached 5,8% in 2007 . At this point, it is important to lay emphasis on the fact that the US dollar is the main currency used in the global market. In other words, the US dollar is the main world’s transactions currency. Hence, the devaluation of the US dollar produced a direct impact on the international financial markets and services.

In such a way, the galloping oil prices, which, though have decreased recently, and the devaluating US dollar aggravated the situation in international financial markets and financial services even more. In this respect, one of the dominant trends in the financial services at the period of the economic recession was and still remains the return of the capital from abroad to the US and other developed countries, which renowned for the export of capital at the epoch of the economic growth. In fact, the level of foreign direct investments has decreased dramatically in recent months as the economic recession progressed. Therefore, the US and leading countries of the UK as well as developed countries, such as Japan, needed to return their financial resources from developing countries as well as developed countries where they invested their capitals. At the same time, the withdrawal of capital had a very negative impact on financial markets and aggravated the economic recession even more. In addition, the macroeconomic instability contributed to the further deterioration of the situation in international financial markets and financial services, while the devaluation of the US dollar affected international trade.

In such a situation, international financial services faced an unparalleled problem of growing losses and decreasing revenues. For instance, the financial service giant Merrill Lynch, announced billions of dollars in losses. Eventually, the agreement was reached for them to be taken over by Bank of America for only two-thirds of its market value. Moreover, other leaders of financial services announced of their problems. For instance, the bank Lehman Brothers shocked the financial markets by filing for bankruptcy, crushed under huge debts that totaled $613 billion (Latham and Braun, 2008). The similar problems faced the insurance giant AIG which was rescued by the Federal Reserve’s injection of $85 billion and gain of 80% stake in the company (Latham and Braun, 2008).  The same trends of falling down of leading financial services companies, banks and insurance groups, could be traced worldwide, especially in well developed countries.

In this respect, it should be said that possible solutions of the profound financial crisis may differ consistently. In fact, they may be quite antagonistic but the most widely spread views on overcoming the current economic recession and crisis in international financial services are: 1) the interference of the state and regular financial injections in the most affected industries, especially financial markets to maintain the balance in the national economy and support leading companies; 2) the liberalization of financial services and national economy.

The leading countries of the world have chosen the way of the state regulation and support of financial markets and national economies.

Central banks of leading countries of the world injected substantial financial resources in the financial services and markets to maintain the stability in the markets and economy at large (Financial Market Behavior and Appropriate Regulation over the Business Cycle, 2002). In fact, the major goal of such financial injection and state support of financial services is to stabilize financial markets, national currency and ensure companies that they can count for the state support to overcome crisis. In such a way, governments and central banks attempt to avoid panic in financial markets which can have a destructive effect on the national economies. At the same time, it should be said that such a policy of the state is innovative for the USA as well as many other countries which tended to liberalization of the economy and financial markets.

In such a context, the suggestion to liberalize financial markets and services, along with the liberalization of economy is contrasting to the current policies of leading countries. In fact, the liberalization can be viewed as a measure which is more traditional for the US economy, but it is necessary to remember of certain risks that accompany liberalization of financial markets and economy. In this respect, the risk of rapid deterioration and rapid downfall of the financial market and national economy at large increases dramatically compared to the state regulation or support of financial services and economy (Ngian, 2002). This is why critics of liberalization (Elekdag et al., 2006) argue that this measure is ineffective in the contemporary business environment when the giants of financial services are about to be totally ruined. On the other hand, it is necessary to take into consideration positive effects of liberalization. The proponents of liberalization (Elekdag et al., 2006) argue that the rapid downfall of financial markets and economies can provoke a profound crisis in global terms and rapid deterioration of the standards of living worldwide. However, the rapid downfall will accelerate the revival of economy and, therefore, financial services. In such a context, it seems to be quite logical that the faster the financial crisis and economic recession reach their lowest point, the faster they will start to grow and recover from the crisis. In such a way, it will be possible to overcome negative of the crisis faster compared to the mild way of the crisis development based on the state support of financial services and economy.

Thus, in conclusion, it should be said that the economic recession provoked a crisis in financial services putting leading financial institutions, national leaders of financial services at the risk of ruin. In such a situation, the crisis is suggested to be solved in two different ways. On the one hand, it is suggested to be solved through the state support of financial services and national economies. On the other hand, the liberalization of financial services and economies is suggested, which implies the rapid downfall that can be compensated by faster economic revival.

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