The global financial crisis became prominently visible in September 2008 with the failure, merger, or conservatorship of several large US-based financial firms.
Addressing a seminar on "Global Financial Meltdown" organised here on Friday by Karachi Branch Council (KBC) of ICMAP, Dr Ishrat Husain, Dean & Director, IBA, Karachi and former Governor State Bank of Pakistan said that these causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading US and European investment banks, insurance firms and mortgage banks consequent to the sub crime mortgage crisis.
He said that beginning with failures of large financial institutions in US, it rapidly evolved into a global credit crisis, deflation and sharp reductions in shipping resulting in a number of European bank failures and declines in various stock indexes, and large reductions in the market value of equities stock and commodities world-wide.
The credit crisis was exacerbated by Section 128 of the Emergency Economic Stabilisation Act 2008 which allowed the Federal Reserve System to pay interest on excess reserve requirement balances held on deposit from banks, removing the longstanding incentive for banks to extend credit instead of hoard cash on deposit with the Fed, he added.
The crisis led to a liquidity problem and the de-leveraging of financial institutions especially in the US and Europe, which further accelerated the liquidity crisis, and a decrease in international shipping and commerce, Dr Ishrat informed.
World political leaders and national ministers of finance and central bank directors have co-ordinated their efforts to reduce fears but the crisis is ongoing and continues to change, evolving at the close of October into a currency crisis with investors transferring vast capital resources into stronger currencies, leading many emergent economies to seek aid from the International Monetary Fund, he added.
Hasan A. Bilgrami, President of ICMA Pakistan, elaborated that the world was being hit by a "financial tsunami" in 2008 that would not spare impoverished nations. "We are having a crisis at hand and the format of global financial system is going down and we will not be able to escape it", he added.
The global financial crisis will strike developing nations soon and under developed will suffer the most, he said. However, he hoped that we are prepared to face the heat. Mohammad Hanif Ajari, Vice President of ICMAP & Director Strategic Development Getz Pharma (Pvt) Limited after September 11, 2001 terrorist attacks central banks around the world tried to stimulate the economy by reducing interest rates to create liquidity in the market.
He said that many institutions offered home loans to borrowers with poor or no credit histories by requiring higher than normal repayment levels, creating "sub -prime mortgages". Adding that end result of these key events was increased foreclosure activity, large lenders and hedge funds declaring bankruptcy, and fears regarding further decreases in economic growth and consumers' spending.
Muhammed Sohail, Director Research, JS Global Capital dilated on the topic. He said in 2006, the fed raised short-term interest rates to prevent inflation, which led some financially weak individuals to default on their mortgage payments. As a result, the banks started to foreclose on the mortgage-defaulted homes, he added.
Sohail informed that the advances in information technology have been extremely favourable to operation of the financial market. At present financial securities trading have been completely computerised, which make it possible for the general public to easily participate in speculative trading of securities, he added.
He said that inside trading is alive and well despite of government measures to prevent it. On the occasion Attaullah A. Rasheed, Chairman, Karachi Branch Council welcomed the participants and informed the Karachi Branch Council of ICMAP has always been active in conducting professional development (CPD) programmes.