Financial Crisis Recovery Essay Example for Free

fiscal Crisis Rec e really overy Essay1997-1998 pecuniary CrisisThe debilenesses in Asiatic fiscal clays were at the root of the crisis that ca accessible occasiond biggerly by the lack of incentives for effective risk perplexity created by implicit or explicit organisation guarantees against failure. The weaknesses of the pecuniary sector similarly were m accepted by rapid crop and accentuated by grownup cap inf starting timeer-rankings, which were partly back up by pegged transposition identifys. In the mid-1990s, a series of external shocks began to change the frugal environment the devaluation of the Chinese Renminbi and the Japanese Yen, rising of U. S. relate appraises which led to a strong U.S. dollar, the sharp decline in semiconductor prices adversely touch their harvest. The crisis began in Thailand when the Thai tical dissect of in July 1997 with a series of big attacks on the baht ext arrested after quite a a few(prenominal) decades of outs tanding sparing performance in Asia. As the U.S. economy recovered from a recession in the early 1990s, the U.S. federal official military reserve cuss under Alan Greenspan began to raise U.S. interest rates to head off inflation.This made the U.S. a much(prenominal) attractive investiture destination relative to southeastern Asia, which had been attracting hot m one(a)y flows through with(predicate) high short-term interest rates, and raised the value of the U.S. dollar. For the sulfureast Asian nations which had currencies pegged to the U.S. dollar, the high U.S. dollar caused their own exports to become more expensive and slight competitive in the orbicular foodstuffs. At the alike cartridge clip, southeastward Asias export growth slowed dramatic exclusivelyy in the spring of 1996, deteriorating their current account position. Many economists believe that the Asian crisis was created not by commercialize psychological science or technology, simply by policie s that distorted incentives within the lenderborrower relationship. Impacts of the crisis to the South East AsiaMost of Southeast Asia and Japan having currency depreciation, cheapend stock markets and some other(prenominal) asset prices, and a precipitous rise in close debt. It were resulting large quantities of book of facts became available generated a highly leveraged stinting climate, and pushed up asset prices to an unsustainable train. These asset prices eventu completelyy began to dissect, causing individuals, pecuniary institutions and corporations in the affected countries were cussrupt. A change in market plan could and did lead into a violent of currency depreciation, insolvency, and upper-case letter outflows, which was difficult to stop. In the course of study after collapse of the baht peg, the value of the most affected East Asian currencies fell 35-83% against the U.S. dollar (measured in dollars per building block of the Asian currency), and the most serious stock declines were as great as 40-60%. Lenders led to a large aimal of trust from the crisis countries, causing a credit crunch and further bankruptcies.Foreign investors attempted to withdraw their money the exchange market was flooded with the currencies of the crisis countries, putting depreciative pressure on their exchange rates. As a result, short-term economic activity has slowed or contract severely in the most affected economies standardized inflation and rising in unemployment. It impossible that the government doing nothing when the crisis happened to their country. To thwart currency value collapsing, countries governments raised pecuniary spending in domestic interest rates to exceedingly high retires (to serve diminish flight of capital by making lending more attractive to investors) and to intervene in the exchange market, buying up any excess domestic currency at the fixed exchange rate with irrelevant reserves.But when interest rates were very hi gh, it crapper be extremely modify to an economy that is healthy, wreaked further havoc on economies in an already fragile state, while the underlying banks were hemorrhaging foreign reserves, of which they had finite nitty-grittys. As a strategy to maintain competitiveness, policies to strengthen the countrys balance-of- handments account were dogd. For example, exports were shape upd and imports were discouraged, the latter through an gain in import appraisees on authentic goods and services. Measures to increase exports for providing handouts in a flash to pot affected included reducing the terms of doing business through much(prenominal)(prenominal) means as tax incentives to boost the manufacturing, agriculture, and services sectors.In the case Malaysia for example, in that respect atomic number 18 policies regarding 1997 crisis Denial and hesitation, the Malaysian government denied that there was a crisis in the starting stick Tight fiscal and mo shed light onary policies, and restructuring the banking arrangement administration proposed to use regional currencies instead of the US dollars in inter-ASEAN bilateral sof devilod and Financing the recovery programs with the entirety cost of exclusively(a) measures was RM62 million. While in the case of Indonesia, the government providing aid to the slimy like efforts to shield curt and vulnerable sections of society from the worst of the crisis, by deepening and widening friendly safety sacks and devoting substantial budgetary resources to increasing subsidies on basic commodities much(prenominal) as rice measures to increase transparency in the monetary, corporate, and government sectors and steps to improve the efficiency of markets and increase competition.Another example of helping the distressing and innocent, government moldiness be decorous and redistrisolelye the wealth equally to them according their basic necessities of life. In Malaysia, the practicing of zakat schema and waqaf parting to help the poor and needy indirectly ordain make the society. Moreover, Bank Rakyat and ar-rahnu market on Moslem pawn-broking volition help the small and medium enterprise to expend their business. Government excessively must divvy up the budget expenditure for subsidizing mainly on education, healthcare and accommodate for the people. The inter contentistic Monetary store (IMF) is an external organization that bears financial attention and advice to member countries. It was created out of a need to prevent economic crises like the wide Depression. With its sister organization, the World Bank, the IMF is the largest human beings lender of funds in the human race. It is a specialized performance of the United Nations and is run by its 186 member countries.Membership is open to any country that conducts foreign insurance and accepts the organizations statutes. The IMF is responsible for the creation and maintenance of the inter matter moneta ry dodging, the system by which international payments among countries take place. A core responsibility of the IMF is to provide contributes to member countries experiencing actual or potential balance of payments conundrums. This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and cook narrow downs for strong economic growth, while undertaking policies to correct underlying problems. Unlike development banks, the IMF does not lend for specific projects. It thus strives to provide a systematic mechanism for foreign exchange transactions in order to foster investment and come on balanced global economic trade. To compass these goals, the IMF focuses and advises on the macroeconomic policies of a country, which affect its exchange rate and its governments budget, money and credit management.The IMF will in addition appraise a countrys financial sector and its regulatory policies, as wel l as structural policies within the macroeconomic that relate to the labor market and employment. In addition, as a fund, it may offer financial assistance to nations in need of correcting balance of payments discrepancies. The IMF is thus entrusted with nurturing economic growth and maintaining high levels of employment within countries. The large financial packages which the IMF has arranged for countries affected by the Asian crisis and its result stick out stimulated a debate some(prenominal) among indemnity-makers and academics as to their costs and benefits. The IMFs bureau in providing financial assistance to its members in overcoming short-term balance-of-payment difficulties generally has been evident.Advantages and dis value of IMFThe IMF offers its assistance which it conducts on a twelve monthly basis for individual countries, regions and the global economy as a whole. However, a country may ask for financial assistance if it finds itself in an economic crisis, wheth er caused by a sudden shock to its economy or poor macroeconomic planning. A financial crisis will result in severe devaluation of the countrys currency or a major depletion of the nations foreign reserves. In re operate for the IMFs help, a country is usually needed to enroll on an IMF-monitored economic reform program, otherwise known asStructural Adjustment Policies (SAPs). An IMF loanword provides a cushion that eases the adjustment policies and reforms that a country must make to correct its balance of payments problem and restore conditions for strong economic growth. Supporters argue that the IMF can also impose necessary reforms on an economy.Reforms such as privatization, fiscal responsibility, control of Money supply, and attacking corruption. These policies may cause short term pain, but, are inseparable for preventing future crisis and long term development. Substantial financial advantages are attached to IMF credits because debtor countries benefit from lower debt service costs. Moreover, commercial banks often demand agreement with the IMF before lending is resumed and generally will laden lower interest rates to countries with an IMF program. The benefits attached to the IMF loan can be regarded as a compensation for the policy adjustments which the debtor countries carry through.At the same age, thanks to the unique role the IMF can play, the costs involved for the creditor countries seem to be rather limited, as the opportunity costs of forgoing the effect of alternative investments are relatively small. By temporarily providing pay and at the same time fosterage adjustment, member countries could overcome external problems without overly detrimental measures either for their own population or for other countries. The interest rates charged by the IMF in normal circumstances can be relatively low, because the special role of the IMF in the international financial system reduces the risks for the IMF itself as well as for the credito r countries which bewilder provided the resources. Because of its special position the IMF can mitigate the risks attached to its loans.Helped by its low funding costs, the IMF can charge debtor countries lower interest rates than private sector participants which turn over to charge high spreads because of the self-reliant risks involved. all over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticized for its lack of office and willingness to lend to countries with big human rights record. On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. These policies tend to involve * Reducing government borrowing high taxes and lower spending * Higher interest rates to stabilize the currency.* Allow failing firms to go bankrupt.* Structural adjustment. Privatizations deregulation, reducing corruption and bureaucracy. The problem is that these policies of structural adjustment and macroeconomic intervention make the situation worse. For example, in the Asian crisis of 1997, many countries such as Indonesia, Korea and Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a serious recession with mass unemployment. The IMF grow been criticized for imposing policy with secondary or no consultation with affected countries. Jeffrey Sachs, the head of the Harvard Institute for International Development said In Korea the IMF insisted that all presidential candidates immediately endorse an agreement which they had no part in drafting or negotiating, and no time to understand.The situation is out of hand. It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 d eveloping countries with around 1.4 billion people. Because the IMF lends its money with draw attached in the form of its SAPs, many people and organizations are vehemently opposed to its activities. Opposition groups statute title that structural adjustment is an undemocratic and inhumane means of loaning funds to countries facing economic failure. debtor countries to the IMF are often faced with having to put financial concerns ahead of fond ones. Thus, by being required to open up their economies to foreign investment, to privatize public enterprises, and to cut government spending, these countries suffer an inability to mightily fund their education and health programs.Moreover, foreign corporations often exploit the situation by taking advantage of topical anaesthetic cheap labor while showing no regard for the environment. The oppositional groups say that locally polite programs, with a more grassroots attempt towards development, would provide greater relief to these ec onomies. Critics of the IMF say that, as it stands now, the IMF is altogether deepening the rift amid the wealthy and the poor nations of the world. Indeed, it seems that many countries cannot end the spiral of debt and devaluation.The relatively low interest rates charged by the IMF can lead to moral hazard behavior on the part of the debtor countries. This is largely reduced through the tough policy measures which the IMF imposes as a condition for its programmers. In practice, most countries do not turn to the IMF if not forced by adverse circumstances. Decisions nearly which countries may borrow money are made by rich countries. Poor countries stomach little say about loans and the conditions attached to them. The IMF will only lend money to countries if they agree to certain conditions. These conditions increase destitution. The livelihoods of people in poorer countries are destroyed by unfair competition from foreign goods and services. The IMF does not outpouring good f inancial advice. Countries have suffered by following it.IMF East Asia CaseThe IMF was involved in one of the worst East-Asian economic crises thus outlying(prenominal). Everything started when Thailand was experiencing difficulties in meeting foreign liability obligations so the IMF intervened by suggested to devalue the Baht. The same suggestion was made to Indonesia, Korea and the Philippine. Soon, South Korea and Taiwan jumped in the trend and Hong Kong and Singapore dollars faced speculative attack. The crisis spread all the way to South America where Brazil and Argentina currency came under attack, but they both s besidesd their grounds and refused to devalue which might have prevented a global financial crisis. Other aspects of the discourse of the case that were looked down upon were the issue of the bail-out and the semipolitical situation of the borrowing country had once again been ignored. Thailand had already borrowed from the IMF and they were bailed-out very public ly which gave an incentive for surrounding countries to follow very risky projects or decisions, believing that the IMF would be a safety net as opposed to a lender of pull round resort.This is what happened in South Korea when large, unprofitable investment projects were underinterpreted, largely due in part to the conglomerates of businesses that are close to the bureaucracy but more importantly, sponsored by the IMF. Likewise, Fund officials protested that many East-Asian countries needed a reform in the banking system and governance, where bad banking, nepotism and corruption do not help create stable and efficient economies. During August celestial latitude 1997, the International Monetary Fund signed three emergency lending agreements with Thailand (August), Indonesia (November), and Korea (December). These programs established packages of international financial carry at an unprecedented cumulative sum of approximately $110 billion, based on the financing commitments. Duri ng the stage August to December, the IMF programs failed dramatically to meet the objective of restoring market confidence.In all three countries, the exchange rate was expected to stabilize, but in fact quickly depreciated far under the targets set in the program, and this despite a very sharp increase in interest rates. Foreign investors remained unconvinced about the debt divine service capacity of the private debtors despite the announced availability of IMF loans, and continued to demand the repayment of short-term loans as they fell due. The IMF programs failed to achieve their goal of maintaining moderate economic growth in the Asian countries. The programs also failed on several(prenominal) intermediate goals, including the preservation of creditworthiness, the continuation of debt payments, and the stabilization of the exchange rate at levels that prevailed upon the signing of the reliable lending agreements Indonesia was deeply affected by the 19971998 crises, more so than its East Asian neighbors. Its economic densification was deeper and more prolonged.It was the only one to experience a (temporary) loss of macroeconomic control. Eight years have passed since the collapse of Suhartos New Order regime on the heels of the economic crisis of 19971998. During that time, Indonesias economy contracted by over 13% in 1998 alone. This followed three decades of virtually uninterrupted rapid economic growth and led to deep social and political crises. Although countries such as South Korea and Thailand were able to overcome their economic crises in a few years, Indonesias crisis resolution has been complicated by political instability, at least(prenominal) until 2004, and by a slower recovery.Indonesia was formally under International Monetary Fund management from 1997 to the end of 2003. But the presence of the IMF actually increased the severity of the Indonesian economy, not more than one year after that there were capital flight out of the country that led to massive unemployment, compounded by the drastic decline in the exchange rate. At the end of 1998 more than 50% of Indonesias population lives below the poverty line. One of the IMFs policy prescriptions is to close 16 banks and it caused the anger of people and withdraws their money in national banks and some foreign banks. In May 1998, due to an agreement amid the IMF and Suharto, the government revoked subsidies for food, and raises the price of anele and electricity.This policy had a strong opposition from the people and not long after that, Suharto regime fell. During Megawati regime, in August 2003 the government finally decided not to continue the IMF program and choose to enter the post-program monitoring. The government option raises the consequences that are not much different. IMF can still continue to dictate economic policy in Indonesia because the government still had to consult every economic policy that will be taken with IMF. The Indonesian government a nnounced that they would pay the remaining debt to the IMF, totaling U.S. $ 7.8 billion, within 2 years. It seems to be the correct political decision to break away from the economic policy interventions that has continued since the crisis in 1997.2008 monetary Crisis Triggered by events in The US and EUThe cause or origination of the 2008 global financial crisis was the boom of the United States hold bubble which peaked in approximately 20052006. Since banks began to give out more loans to potential home owners, housing prices began to increase. The increase in house price and improvement of construction activity started around 1992. At that time the national Reserve was holding its policy interest rate at an unusually low level by the standards of the past few decades. The good times lasted until 2005, when monetary policy was tightening after another spell of low interest rates. Over that period, construction activity contributed 1/5 percentage points every year to the growt h rate of authorized gross domestic product, and the share of employment in construction and finance, out of the total workforce, bloom from 10 percent to 11 percent. That is, over this period, of the 27.4 million people added to work rolls (which ended 2006 with a total of 136 million), 4.8 million were directly related to construction and fifi nance. Finally, the nation was left with an excess stock of housing.A capsule in construction transpired to wind down the inventory overhang, which is often a feature of economic slowdowns and recessions. In addition to that, easy lending standards also contributed to the Real estate bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain. 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. That physical body of financial innovation attracted 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. While the housing and credit bubbles were expanding, US Government was going a process called financialization.US 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 tender activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the increasingly important role play by financial institutions such as investment banks and hedge funds, also known as the ghost banking system. These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans expound above and did not have a financ ial cushion sufficient to absorb large loan defaults or MBS losses.These losses shamed the ability of financial institutions to lend, slowing economic activity. The U.S. Financial Crisis Inquiry rush reported its findings in January 2011. It concluded that the crisis was avoidable and was caused by 1. Widespread failures in financial regulation, including the Federal Reserves failure to stem the tide of toxic mortgages 2. Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk 3. An volatile mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis 4. Key policy makers ill prepared for the crisis,5. Lacking a full understanding of the financial system they oversaw and systemic breaches in accountability and ethics at all levels.3536 Table 1 The Causes and Impacts of world-wide Financial CrisisTaken from Takatoshi Ito Comparison of the Financ ial Crises Japan and Asia in 1997-1998 vs. U.S. 2008-09 The recess of World TradeAlthough the crisis is originally from financial sector, trade had great implication that hit countries around the world. Exports collapsed in nearly every major occupation country, and total world trade fell faster than it did during the Great Depression. From a peak in July 2008 to the low in February2009, the nominal value of world goods exports fell 36 percent the nominal value of U.S. goods exports fell 28 percent (imports fell 38 percent) over the same period. Even a country such as Germany, which did not experience their own housing bubble, undergo substantial trade contractions, which helped spread the crisis. The collapse in net export in Germany contributed to the decline in their gross domestic product which put the country into recession. In the fourth quarter of 2008, Germanys give in net exports contributed 8.1 percentage points to a 9.4 percent decline in GDP (at an annual rate) Japan s net exports contributed 9.0 percentage points to a 10.2 percent GDP decline. Real exports fell even faster in the first quarter of 2009.The Decline in Output Around the GlobeThe financial crisis was rapidly transmitted to the real economy. The financial disruption was so strong and swift in most countries so that their confidence level in economy fell as well. Confidence levels are measured in different shipway crossways countries, but they were generally falling throughout 2008 and reached recent lows in the fall of 2008 and winter of 2009. As noted, world GDP is estimated to have fallen roughly 1.1 percent in 2009 from the year before.In advance economies, the crisis was even deeper the IMF expects GDP to have contracted 3.4 percent in advanced economies for all of 2009. For OECD member countries, GDP fell at an annual rate of 7.2 percent in the fourth quarter of 2008 and 8.4 percent in the first quarter of 2009. Despite the historic nature of its collapse, the U.S. economy a ctually fared better than about half(a) of OECD economies during those quarters. The decline in industrial production across major economies, each of these economies in January 2009 was more than 10 percent below its January 2008 level, and Japan faring far worse relative to the other major economies. Impact on Developing CountriesThe impact of the crisis on developing countries will affect different types of international resource flows private capital flows such as Foreign Direct Investment (FDI), portfolio flows and international lending official flows such as development finance institutions and capital and current transfers such as official development assistance and remittances. The World Association of Investment Promotion Agencies foresees a 15% drop in FDI 2009. FDI to Turkey has already fallen 40% over the last year and FDI to India dropped by 40% in the first 6 months of 2008. FDI to China was $6.6 billion in September 2008, 20% down from the monthly average in year 200 8 so far, and mining investments in South Africa and Zambia have been put on hold.The crisis has led to a drop in bond and equity issuances and the sell-off of risky assets in developing countries. The average volume of bond issuances by developing countries was only $6 billion between July 2007 and March 2008, down from $ 15 billion over the same period in 2006. Between January and March 2008, equity issuance by developing countries stood at $5 billion, its lowest level in five years. As a result, World Bank explore suggests some 91 International Public Offerings have been withdrawn or postponed in 2008.However, not all developing countries were effected tremendously by 2008 financial crisis. In South East Asia we may take a look Indonesia performance towards the 2008 financial crisis. Indonesia experienced a significant macroeconomic shock at the end of 2008. But, of course, Indonesia was not on its own. Indeed, Indonesia was one of the least affected countries in South East Asia . Although GDP growth slowed markedly to 4.4% in the first quarter of 2009, it did not experience the collapse in growth experienced by countries such a Korea, Thailand and Malaysia.Indonesias growth in recent years has been goaded predominantly by non-tradeables rather than tradeables, and, although the crisis reduced growth across the board, sectors such as transport and communications, and utilities have continued to grow in double digits. At the same time, the tradeable sector which has performed best is agriculture, which, at 4.8%, has experienced its strongest growth since the East Asian crisis, helping to compensate for the effects of the crisis. Indonesia has learnt from 1997 crisis so that they can manage 2008 financial crisis well. The Role of International Institutions of The G-20The G-20, which includes 19 nations plus the European Union, is the the main nations of much of the coordination on trade policy, financial policy, and crisis repartee. Its membership is compose d of most of the worlds largest economies and makes up nearly 90 percent of world gross national product. The first G-20 leaders summit was held at the peak of the crisis in November 2008. At that point, G-20 countries committed to keep their markets open, adopt policies to support the global economy, and stabilize the financial sector. The second G-20 leaders summit took place in April 2009 at the height of concern about rapid falls in GDP and trade. leading of the worlds largest economies pledged to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital. Furthermore, they committed to work together on tax and financial policies. Perhaps the most luminary act of world coordination was the decision to provide substantial new funding to the IMF. U.S. leadership helped secure a commitment by the G-20 leaders to provide over $800 billion to fund multilateral banks givingly, with over $ five hundred billion of those fun ds allocated to the IMF in particular.In September 2009, the G-20 leaders met in Pittsburgh. They noted that international cooperation and national action had been critical in arresting the crisis and putting the worlds economies on the path toward recovery. They also recognized that continued action was necessary, pledged to sustain our strong policy response until a steadfast recovery is secured, and committed to avoid premature withdrawal of stimulus. They launched a new Framework for Strong, Sustainable, and Balanced increment that committed the G-20 countries to work together to assess how their policies fit together and evaluate whether they were collectively consistent with more sustainable and balanced growth. Further, the leaders committed to act together to improve the global financial system through financial regulatory reforms and actions to increase capital in the system. It set up emergency lines of credit (called Flexible Credit Lines) with Colombia, Mexico, and Pol and, which in total are worth over $80 billion.These lines were intended to provide immediate runniness in the event of a run by investors, but also to omen to the markets that funds were available, making a run less likely. In each of these countries, markets responded positively to the announcement of the credit lines, with the cost of insuring the countries bonds narrowing (International Monetary Fund 2009b). The IMF also negotiated a set of standby agreements with 15 countries, committing a total of $75 billion to help them survive the economic crisis by smoothing current account adjustments and mitigating liquidity pressures. IMF analysis suggests that this program discouraged large exchange-rate f in fluctuate in these countries (International Monetary Fund 2009). These actions as well as the very existence of a better-funded global lender may have helped to keep the contraction short and to prevent sustained currency crises in many emerging nations.The Government ResponsesT he U.S. executed two stimulus packages, totaling nearly $1 trillion during 2008 and 2009. The U.S. Federal Reserves new and spread out liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, widening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity. United States President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expand regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others. The response of the Federal Reserve, the European Central Bank, and other central banks was taken shortly and dramatic.During the last quarter of 2008, these cen tral banks purchased US$2.5 trillion of government debt and troubled private assets from banks. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks. In October 2010, Nobel laureate Joseph Stiglitz explained how the U.S. Federal Reserve was implementing another monetary policy creating currency as a manner to combat the liquidity trap. By creating $600,000,000,000 and inserting this directly into banks, the Federal Reserve intended to spur banks to finance more domestic loans and refinance mortgages. However, banks instead were spending the money in more profitable areas by commit internationally in emerging markets.The bank bailout, more formally called the Troubled Asset Relief Program, failed to achieve the ultimate goal. The goal of these bailouts from the view of the largest financial institution is billions of dollars in taxpayer money allow ed institutions that were on the brink of collapse not only to survive but even to flourish. The legislation that created TARP, the Emergency Economic Stabilization Act, had far broader goals, including protecting home values and preserving homeownership. Congress was told that TARP would be used to purchase up to $700 billion of mortgages and to obtain the necessary votes, Treasury promised that it would modify those mortgages to assist struggling homeowners.However, almost immediately, as permitted by the broad language of the act, Treasurys plan for TARP shifted from the purchase of mortgages to the infusion of hundreds of billions of dollars into the nations largest financial institutions, a shift that came with the express promise that it would restore lending. Treasury, however, provided the money to banks with no effective policy or effort to force the extension of credit. in that location were no strings attached no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a gather up that banks report how they used TARP funds. It raised the issues on accountability in providing the bailouts.Lesson Learnt from 2008 CrisisThere are several lessons that can be learnt from 2008 financial crisis. Those lessons are stated below 1. Aggregate volatility is part of market system. There is a need to have more depth study of aggregate volatility. 2. Long lived large firms (such as financial institutions) may not be fully trusted. We should rethink the role of reputation of firms in market transactions. In addition, we need to revisit the key elements of the economy of organization so that reputation should be derived from the behavior not merely from the asset. 3. Economic growth will only take place if there is real increase in the real commodities not financial commodities. 4. People mistakenly equated free markets with unregulated markets. 5. Policy makers should be flexible in their policies and guid ed by overall national objectives. 6. All trading countries should diversify both their exports composition as well as export destination. 7. World financial system is becoming fragile so that there is a need to reform the current financial system. Moslem based economy system has great opportunity to alter the existing financial system. Islamic perspectiveFrom Islamic perspective, the approach that most suitable which is providing handout to the poor and directly to people affected by financial contracts. There were horrible gaps between the rich and the poor all over the world, which remained existent all the time, even after the fall of the planned economy. It goes without saying that the position in developing and under create countries is even worse. This uneven and unjust system of distribution needs to be reformed on a conceptual basis. The entire world today is crying on the establish financial crisis, but few people have realized that this is basically a crisis of rich pe ople who were playing with loads of wealth, and all of a sudden, their income faced a steep fall. So far as poor people are concerned, they have been living in perpetual crisis all the times, but no one care for them, The bear witness crisis should not be examined within the relatively narrow confines of debt rather, it is fundamentally a motion of social justice, a concept that is paramount in Islam. Social justice includes three aspects, namely a fair and equitable distribution of wealth the provision of basic necessities of life to the poor and the needy and protection of the weak against economic exploitation by the strong.The debt burden, however, is increasing inequality between rich and poor countries and is tantamount to exploitation. It also means that poor countries are often unable to provide the most basic services for their citizens. The wide debt that currently burdens poor countries has arisen from loans that have charged interest and have not shared risk between t he lender and the borrower and have, therefore, contravened the two most fundamental principles of Islamic finance. Islamic commands to refrain from charging interest and to share financial risk seek to avoid the concentration of wealth and the economic exploitation of the weak and thereby prevent situations such as the current debt crisis from arising in the first place. The core belief in Islamic finance is that money should not in itself be an earning asset therefore, Islam prohibits any and all forms of interest.There are also other systems which prevent an economic crisis of pandemic proportions to arise contractual relationships in business, finance or trade must be based on trust and familiarity of networks of common experiences (takaful) which implies that debts cannot be repackaged and resold as assets globally to anonymous investors while profit must be redistributed directly to the poor (zakat) in the Holy month of Ramadan to build and strengthen social safety nets throu gh institutions of charity public assistance and education. Over and above zakat, all Islamics pay zakat fitrah to the poor, during the month of Ramadan, either through state collection centers or direct contributions to the poor. There is a trend within rural areas to identify destitute families and the disabled within the underserved rural areas of the State where they reside. Over the last few years, increasing realization of a topic poverty during an economic crisis creating the new poor among the Muslim running(a) classes and abnormally high repayment rates through unlicensed loan-sharks and licensed money-lenders have made national banking institutions which serve the poorer rural communities shift their services to the Ar-Rahnu market or Islamic pawn-broking market. soon four Islamic financial institutions, Bank Rakyat (The Peoples Bank) the Yayasan Pembangunan Ekonomi Islam Malaysia (Islamic Foundation of Economic Development, Malaysia) Permodalan Kelantan Bhd (Kelantan I nvestment Co.) and the Agro bank offer such services to the rural and urban working classes. It has established an Ar-Rahnu XChange licence Network, where it plans to provide an Ar-Rahnu franchise throughout the country, managed by reputable cooperatives of the working classes. Given the acute dependency of the working classes on ready cash in times of emergency and the high rates of interest in regular pawn-broking market, there seems to be few alternatives shut to expand the Ar-Rahnu market among Muslims and non-Muslims and charge the poor for tutelage services, rather than interest. Despite the fact that loan disbursements of Bank Rakyat alone is among the services which have contributed to Bank Rakyats amazing rise as a successful national cooperative bank, giving out higher than normal dividends to its share holders, loan sharks are virtually setting up desks outside flats and apartment buildings of the Muslim poor in towns and cities to offer cash and carry facilities to th e desperately poor.This lucrative market speaks volumes of the rise of atopic poverty among those on or below the poverty line, the inadequacy of zakat and disbursements of zakat, the high dependency on regular income earners among the spirit classes for welfare driven services and products and unclear nature of the rising wealth of the Muslim and non-Muslim upper classes in Malaysia The Islamic finance can bring on significant gains in money released into public capital and infrastructure. The redistributive mechanisms of surplus are instituted into welfare based institutions such as free or subsidized education, health and child care, education, and even publicly directed employment. Its principles may differ from modern welfare political economy except the gains at the far end of the redistributive machinery are similarly directed towards the poor. The policies of the New Economic Policy in Malaysia, state welfares in Brunei, or publicly instituted employment as in MENA countrie s are more Islamic than regular, except they are part of the post-colonial reformist policies of Muslim states which preceded the modern up-beat drive towards Syariaah compliant finance. Islamic finance, however, has not demonstrated a clear connectivity with redistributive justice as in the post-colonial political economy except through instituted deductions of zakat from dividends of shareholders.Profits from credit or financial corporations are not necessarily redistributed through zakat. Furthermore, for borrowers, the comprehended value of assets and services as forecasted and built into systems and rates of repayments which compensate for the lack of interest and, in reality, repayment rates may even out with the regularrates are generally fixed in advance unlike regular interest rates which are more flexible, varying according to market conditions. However, it does allow more capital to be released into projects immediately, allowing a more extensive amount of goods and serv ices to be produced, without the worry of serving loans. One, however, has to be assured of significant productivity even in the early stages of the loan but payments of zakat accruing from successful investment, from the financier or production from the borrower are fixed at a low rate of 2.5%. It is also consensual rather than forced (as in income taxation) and Muslim countries in general pursue income tax collections as the more important thrust of national revenue.There are generally two disparate systems at work in Muslim countries Islamic finance and post-colonial welfare instituted economics. The welfare inputs in Islamic countries which are operational today proceed whether or not there are institutions of Islamic finance in the country. In Malaysia, Brunei, and the MENA countries discussed in this paper, components of welfare economics in heavily subsidized education, health, housing, farming, and welfare for the poor, are part of a post-colonial legacy of social reform to institute economic parity across groups and classes. In these Muslim nations, the public sector has played an important role in employment for Muslim or indigenous citizens, often acting as a social safety net in times of economic crises. However, these welfare driven policies are subject to much criticism since they favour the poor, encourage low productivity, and a non-competitive public sector. As Islamic institutions of welfare catch on with progressive social education through media and networks and become an alternative system of welfare for poorer Muslims through zakat and other contributions, welfare increasingly becomes a social responsibility of the Muslim middle classes.There is hardly any data on how the profits earned by larger corporations of Islamic finance actually become instituted into a system of welfare economics based in Islam. Private investment trusts of political elites or national trusts controlled by them. In a properly instituted system of redistribution, through wages, salaries, educational, and health subsidies and so on, there should be very little wealth differential between the owners of political Capital and citizens but economic disparities are significant in these Muslim countries and it has been shown how gains among the lowest 20% may be offset by higher or equivalent gains among the top 20% income earners of these nations. The production of stable professional middle classes in these nations has led to an enrichment of social capital and welfare driven redistributive institutions through social networks but Islamic conscientisation had sometimes moved this spiritual gain as an objective reality. The belief in ibadah or to do good may outdo the call for greater transparency in the use of national collections of zakat and so on.Many Muslims in Malaysia pay both income tax and zakat, rather than ask for exemption from income tax. They also maintain Islamic voluntary organizations with personalized funds, donate to mosques a nd charities, and make endless food contributions to orphans and the poor. There is very little data gathered on the actual amounts paid privately or anonymously and state-directed contributions, although increasing, are not reflective of actual payments contributed by the middle classes towards Islamic charitable institutions.On the other hand, Muslim based banking and financial institutions are unsung in their social responsibility towards the poor, including their own clients who may be victims of topic poverty during times of economic crises. In conclusion, Islamic institutions of trusts which are state directed or privately administered by banking and credit agencies drive out more humanistic principles of investment and redistribution of profits except that there is a missing componentbetween the principles of redistribution of surplus or profits in Islam finance and the actual mechanisms to provide welfare to the people who are not share-holders or stake-holders. In Malaysi a, Brunei, and the MENA countries of the Middle East and North Africa, state agencies assume trusteeships over coercive collections like the zakat but do not have any institutional mechanisms to enforce private corporations local or foreign to contribute towards the welfare of the poor.ConclusionThe first Financial crisis was began in July 1997 when the Thai baht collapse with a series of speculative attacks on the baht extended after quite a few decades of outstanding economic performance in Asia and most of Southeast Asia and Japan having currency depreciation. There some approach to help financial recovery, It is impossible that the government doing nothing when the crisis happened to their country. To prevent currency values collapsing, governments raised fiscal spending in domestic interest rates to exceedingly high levels. And last approach Government providing handouts directly to people affected and providing assistance to the poor like efforts to shield poor and vulnerable sections of society from the worst of the crisis The International Monetary Fund (IMF) is an international organization that provides financial assistance and advice to member countries. It was created out of a need to prevent economic crises like the Great Depression.The large financial packages which the IMF has arranged for countries affected by the Asian crisis and its result have stimulated a debate both among policy-makers and academics as to their costs and benefits. However, IMF has also been criticized for its lack of accountability and willingness to lend to countries with bad human rights record debtor countries to the IMF are often faced with having to put financial concerns ahead of social ones The cause or trigger of the 2008 global financial crisis was the boom of the United States housing bubble which peaked in approximately 20052006. The impact of the crisis on developing countries will affect different types of international resource flows private capital flows su ch as Foreign Direct Investment (FDI).However, not all developing countries were effected tremendously by 2008 financial crisis, Indonesia was one of the least affected countries in South East Asia. The G-20, is the the main nations of much of the coordination on trade policy, financial policy, and crisis responses. The first G-20 leaders summit was held at the peak of the crisis in November 2008. The bank bailout, more formally called the Troubled Asset Relief Program, failed to achieve the ultimate goal From Islamic perspective approach that most suitable which is providing handout to the poor and directly to people affected by financial contracts the present crisis should not be examined within the relatively narrow confines of debt, rather it is fundamentally a question of social justice, a concept that is paramount in Islam.The practicing of zakat system and waqf contribution to help the poor and needy indirectly will benefit the society. And this is the best approach that gove rnment should do by providing help directly to the poor and people affected by financial contract namely firms and banks. If government reduced the amount tax to be paid, cost of production will decrease level of employment and production will increase. Meanwhile, banks will bail out to save company and people indirectly reduced the worry of public causing the level of borrowing and consumption raises. So, as a result, it can stimulate the capital investment of the economy to increase the economic growth and level of GPD.ReferencesFadillah Putra, Economic Development and Crisis Policy Responses in Southeast Asia (Comparative study of Asian Crisis 1997 and Global Financial Crisis 2008 in Malaysia, Thailand and the Philippines) (2008), Public Administration Department, Brawijaya UniversityFederal Reserved Bank of San Francisco Economic Letter What Caused East Asias Financial Crisis? 98-24 August 7, (1998) Hussein Alasrag, Global Financial crisis and Islamic finance (2007)http//www.muf titaqiusmani.com/index.php?option=com_contentview=articleid=41present-financial-crisis-causes-and-remedies-from-islamic-perspective-catid=12economicsItemid=15,retrieve on 11 November 2012 http//www.academia.edu/1133515/Global_Financial_Crisis_An_Islamic_Perspective, retrieve on 4 November 2012 http//en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008cite_note IMF_Loss_Estimates-31, retrieve on 4 November 2012Mohamed Ariff, Syarisa Yanti Abubakar,The Malaysian Financial Crisis Economic Impact and recovery Prospects (1999) The Developing Economies, XXXVII-4 41738Reinhart, V. (2011). A year of living dangerously The Management of the Financial Crisis in 2008. Journal of Economic Perspective.25 (1). Pg 71-90. IbidRecovery from the Asian Crisis and the Role of the IMF, IMF Staff (2000)http// www.investopedia.com/articles/economics/09/international- monetary-fund imf.aspaxzz2EQhoHzz9, retrieve on 4 November 2012http//www.nrcc.org/default/Issues2012/2012_Issues_Book_Chapter_Finan cial_Crisis_Bailouts_and_Financial_Reforms 1 . Federal Reserved Bank of San Francisco Economic Letter What Caused East Asias Financial Crisis? 98-24 August 7, 1998 2 . Federal Reserved Bank of San Francisco Economic Letter What Caused East Asias Financial Crisis? 98-24 August 7, 1998 3 . www.wikipedia.com 4 . www.wikipedia.com 5 . www.wikipedia.com 6 . Federal Reserved Bank of San Francisco Economic Letter What Caused East Asias Financial Crisis? 98-24 August 7, 1998 7 . www.wikipedia.com 8 . Mohamed Ariff, Syarisa Yanti Abubakar, (1999) The Malaysian Financial Crisis Economic Impact and Recovery Prospects The Developing Economies, XXXVII-4 41738 9 . Economic Development and Crisis Policy Responses in Southeast Asia (Comparative study of Asian Crisis 1997 and Global Financial Crisis 2008 in Malaysia, Thailand and the Philippines) Fadillah Putra, Public Administration Department, Brawijaya University 10 . Recovery fromthe Asian Crisis and the Role of the IMF, IMF Staff (2000) 1 1 . http//www.investopedia.com/articles/economics/09/international-monetary-fund-imf.aspaxzz2EQhoHzz9 12 . http//www.twnside.org.sg/title/sick-cn.htm 13 . Reinhart, V. (2011). A year of living dangerously The Management of the Financial Crisis in 2008. Journal of Economic Perspective.25 (1). Pg 71-90. 14 . Ibid 15 . Ibid 16 . Ibid 17 . Wikipedia. Financial Crisis 2007. Taken from http//en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008cite_note-ssrn-8 18 . Wikipedia. Financial Crisis 2007. Taken from http//en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008cite_note-IMF_Loss_Estimates-31 19 . Ibid 20 . Greenspan-We Need a Better Cushion Against Risk. Financial Times. March 26, 2009. Taken from http//www.ft.com/cms/s/0/9c158a92-1a3c-11de-9f91-0000779fd2ac.html. 21 . FCIC Report-Conclusions Excerpt-January 2011. Taken from http//c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_conclusions.pdf 22 . CRISIS AND RECOVERY IN THE human being ECONOMY. Ta ken from http//www.whitehouse.gov/sites/default/files/microsites/economic-report-president-chapter-3r2.pdf 23 . Ibid 24 . Ibid 25 . Ibid 26 . Ibid 27 . Ibid 28 . Velde, D. W. (2008). Effects of the Global Financial Crisis on Developing Countries and Emerging Markets. Policy responses to the crisis. INWENT/DIE/BMZ conference in Berlin, 11 December 2008. 29 . Ibid 30 . Ibid 31 . Ibid 32 . Ibid