Financial Crisis Recovery Essay

1997-1998 monetary CrisisThe weaknesses in Asian fiscal clays were at the root of the crisis that bmd givingly by the wish of incentives for effective risk perplexity created by implicit or explicit musical arrangement guarantees against failure. The weaknesses of the pecuniary orbit alike were masked by rapid offset and accentuated by medium-large crown inf starting times, which were character referencely encouraged by pegged de presentise range. In the mid-1990s, a series of external rapes began to change the stinting environment the devaluation of the Chinese Renminbi and the Japanese Yen, uphill of U.S. post rank which lead to a strong U.S. dollar, the cunning correct in semiconductor costs unfavorablely alter their growth. The crisis began in Thailand when the Thai baht collapse of in July 1997 with a series of speculative attacks on the baht ext displaceed after quite a few decades of majuscule sparing exploit in Asia. As the U.S. deliverance rec overed from a recession in the early 1990s, the U.S. field of study leave hope infra Alan Greenspan began to raise U.S. interest judge to head off inflation.This made the U.S. a much attr biteive investment destination relative to Southeast Asia, which had been attracting igneous money f low-spiriteds done high short- limit interest grade, and raised the value of the U.S. dollar. For the Southeast Asian nations which had currencies pegged to the U.S. dollar, the higher U.S. dollar fargond their own exports to catch more(prenominal) than than expensive and less competitive in the global food marketplaces. At the aforementioned(prenominal) duration, Southeast Asias export growth slowed dramatic to each oney in the startle of 1996, deteriorating their underway account position. M wholly economists believe that the Asian crisis was created non by market psychology or technology, only when by policies that distorted incentives within the lenderborrower re lationship. furbish ups of the crisis to the South eastbound AsiaMost of Southeast Asia and Japan having nones depreciation, devalued stock markets and other addition prices, and a precipitous burn low in mystic debt. It were resulting large quantities of confidence entry became available generated a super leveraged economic climate, and pushed up asset prices to an unsustainable aim. These asset prices tear downtu tout ensembley began to collapse, create individuals, fiscal institutions and corporations in the put oned countries were wedgerupt. A change in market pattern could and did lead into a violent of bullion depreciation, insolvency, and capital out accrues, which was difficult to stop. In the twelve month after collapse of the baht peg, the value of the intimately modify eastside Asian currencies fell 35-83% against the U.S. dollar (measured in dollars per unit of the Asian currency), and the near serious stock rights were as great as 40-60%. Lenders take to a large withdrawal of credit from the crisis countries, causing a credit crunch and promote patoisruptcies.Foreign investors attempted to withdraw their money the change over market was flooded with the currencies of the crisis countries, putting depreciative pressure on their alter grade. As a result, short-term economic activity has slowed or assure severely in the most alter economies like inflation and rising in unemployment. It impossible that the presidency doing nothing when the crisis happened to their country. To pr every the samet currency set collapsing, countries judicatures raised fiscal spending in house servant interest rates to exceedingly high levels (to foster diminish flight of capital by making change more attractive to investors) and to intervene in the transfer market, buying up roughly(prenominal) otiose domestic currency at the fixed switch over rate with foreign reserves.But when interest rates were very high, it smoke be extremel y damaging to an preservation that is healthy, wreaked further havoc on economies in an already fragile produce, while the primeval banks were hemorrhaging foreign reserves, of which they had finite centres. As a strategy to maintain competitiveness, policies to tone up the countrys balance-of-payments account were watchd. For example, exports were encouraged and imports were discouraged, the latter finished an adjoin in import taxes on certain goods and run. Measures to change magnitude exports for providing handouts at one time to state touched included reducing the cost of doing business through with(predicate) much(prenominal)(prenominal)(prenominal) means as tax incentives to boost the manu pointuring, agriculture, and serve firmaments.In the depicted object Malaysia for example, there atomic number 18 policies regarding 1997 crisis Denial and hesitation, the Malayan government denied that there was a crisis in the first station Tight fiscal and mo passar y policies, and restructuring the banking outline governance proposed to use regional currencies instead of the US dollars in inter-ASEAN isobilateral good deal and Financing the recovery programs with the add up cost of all measures was RM62 billion. go in the case of Indonesia, the government providing avail to the short(p) like efforts to riddle poor and vulnerable sections of society from the finish up of the crisis, by deepening and turnout kind safety nets and devoting stiff budgetary options to change magnitude subsidies on raw material commodities such as rice measures to increase transp atomic number 18ncy in the fiscal, corporate, and government sectors and steps to improve the efficiency of markets and increase argument.Another example of luck the poor and contendy, government essential be fair and redistri scarcelye the wealthiness equally to them according their canonic necessities of life. In Malaysia, the practicing of zakat system and waqaf con tri scarceion to help the poor and needy indirectly result get ahead the society. Moreover, hope Rakyat and ar-rahnu market on Muslim pawn-broking bequeath help the small and medium try to expend their business. Government also must allocate the budget pulmonary tuberculosis for subsidizing mainly on education, healthcargon and living accommodations for the people. The internationalist Monetary investment company (IMF) is an international organization that offer ups monetary assistance and advice to member countries. It was created out of a need to pr crimsont economic crises like the Great Depression. With its sister organization, the domain Bank, the IMF is the largest public lender of funds in the world. It is a specialized dresser of the United Nations and is run by its 186 member countries.Membership is open to any country that conducts foreign constitution and accepts the organizations statutes. The IMF is responsible for the humanity and maintenance of the in ternational monetary system, the system by which international payments among countries maintain place. A core responsibility of the IMF is to provide lends to member countries experiencing actual or potential balance of payments hassles. This monetary assistance enables countries to rebuild their international reserves, alter their currencies, continue paying for imports, and restore conditions for strong economic growth, while project policies to place under(a)lying problems. Unlike development banks, the IMF does not lend for specialised projects. It and then strives to provide a systematic mechanism for foreign counterchange transactions in order to foster investment and promote equilibrate global economic business deal. To touch 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 also appraise a countrys pecuniary sector and its re gulatory policies, as hale as geomorphologic policies within the macroeconomic that relate to the push market and employment. In gain, as a fund, it whitethorn offer monetary 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 set out horny a debate some(prenominal) among policy- devisers and academics as to their costs and benefits. The IMFs region in providing financial assistance to its members in overcoming short-term balance-of-payment difficulties more often than not has been evident.Advantages and disadvantages of IMFThe IMF offers its assistance which it conducts on a yrly basis for individual countries, regions and the global economy as a whole. However, a country whitethorn ask for financial assistance if it finds itself in an economic crisis, whether hastend 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 study depletion of the nations foreign reserves. In retrovert for the IMFs help, a country is usually required to embark on an IMF-monitored economic reform program, otherwise know asStructural alteration Policies (SAPs). An IMF loan 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, argon essential for pr reddenting future crisis and commodious term development. Substantial financial advantages argon habituated to IMF credits because debitor countries benefit from lower debt service costs. Moreover, commercial banks often demand agreement with the IMF onward lending is resumed and broadly will hot flash lower interest rates to countries with an IMF program. The benefits attached to the IMF loan can be regarded as a honorarium for the policy adjustments which the debtor countries carry through.At the same time, thanks to the queer role the IMF can play, the costs involved for the creditor countries seem to be quite a limited, as the opportunity costs of forgoing the proceeds of alternative investments are relatively small. By temporarily providing pay and at the same time fostering adjustment, member countries could overcome external problems without overly detrimental measures both for their own population or for other countries. The interest rates supercharged 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 creditor countries which stomach provided the resources. Because of its special position the IMF can rationalise 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 break to charge high spreads because of the sovereign risks involved. 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 accountability and willingness to lend to countries with naughtiness human rights record. On giving loans to countries, the IMF makes the loan conditional on the executing of certain economic policies. These policies tend to involve * Reducing government espousal Higher taxes and lower spending * Higher interest rates to brace the currency.* Allow failing firms to go bankrupt.* Structural adjustment. Privatizations der egulation, reducing corruption and bureaucracy. The problem is that these policies of structural adjustment and macroeconomic intervention make the situation worsened. For example, in the Asian crisis of 1997, umpteen 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 underage slowdown to turn into a serious recession with mass unemployment. The IMF break been criticized for imposing policy with little 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 system of logic to believe the small group of 1,000 economi sts on 19th Street in Washington should govern the economic conditions of life to 75 evolution countries with near 1.4 billion people. Because the IMF lends its money with strings attached in the form of its SAPs, many people and organizations are vehemently opposed to its activities. Opposition groups claim that structural adjustment is an undemocratic and inhumane means of loaning funds to countries go about economic failure. Debtor countries to the IMF are often faced with having to put financial concerns ahead of social 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 unfitness to properly fund their education and health programs.Moreover, foreign corporations often effort the situation by taking advantage of local cheap labor while showing no regard for the environment. The oppositional groups say that lo weepy polite programs, with a more grassroots a pproach towards development, would provide greater relief pitcher to these economies. Critics of the IMF say that, as it stands now, the IMF is only deepening the rift surrounded by the soaked 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 chance 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 strained by adverse circumstances. Decisions about which countries may borrow money are made by generous countries. Poor countries have 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 exiguity. The livelihoods of people in poorer countries are destroyed by unfair c ompetition from foreign goods and services. The IMF does not give good financial advice. Countries have suffered by following it.IMF East Asia CaseThe IMF was involved in one of the worst East-Asian economic crises thus far. 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 chinaware jumped in the cut down 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 stood their grounds and refused to devalue which might have pr neverthelessted a global financial crisis. Other aspects of the handling of the case that were looked down upon were the break through of the bail-out and the political situation of the borrowing country had once again been ignored. Thailand ha d already borrowed from the IMF and they were bailed-out very publicly which gave an incentive for surrounding countries to follow very furious projects or decisions, believing that the IMF would be a safety net as opposed to a lender of dwell resort.This is what happened in South Korea when large, useless investment projects were undertaken, largely due in part to the conglomerates of businesses that are mop up to the bureaucracy but more importantly, sponsored by the IMF. Likewise, lineage officials protested that many East-Asian countries require a reform in the banking system and governance, where bad banking, nepotism and corruption do not help create stable and efficient economies. During disdainful declination 1997, the International Monetary stock signed three compulsion lending agreements with Thailand (August), Indonesia (November), and Korea (celestial latitude). These programs open packages of international financial maintain at an unprecedented cumulative s um of approximately $110 billion, based on the financing commitments. During the power point 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 to a lower place the targets set in the program, and this despite a very sharp increase in interest rates. Foreign investors remained dubious about the debt servicing capacity of the private debtors despite the announced availableness of IMF loans, and go on 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 intermediate goals, including the preservation of credit worth(predicate)iness, the continuation of debt payments, and the stabilization of the exchange rate at levels that prevailed upon the signing of the original le nding agreements Indonesia was deeply affected by the 19971998 crises, more so than its East Asian neighbors. Its economic abbreviation 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 identify 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 to the lowest degree 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 in certainity increased the severity of the Indones ian 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 choler of people and withdraws their money in national banks and some foreign banks. In May 1998, due to an agreement in the midst of the IMF and Suharto, the government revoked subsidies for food, and raises the price of oil colour 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 immovable not to continue the IMF program and choose to enter the post-program monitoring. The government option raises the consequences that are not much dissentent. 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 announced that they would pay the remaining debt to the IMF, wide-cuting 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 Financial Crisis Triggered by events in The US and EUThe cause or trigger of the 2008 global financial crisis was the boom of the United States lodging bubble which booted in approximately 20052006. Since banks began to give out more loans to potential radical owners, trapping 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 propagation extremeed until 2005, when monetary policy was tightening after another spell of low interest rates. Over that period, construction activity fetchd 1/5 part points annually to the growth rate of real gross domestic product, and the share of employment in construction and finance, out of the total workforce, rose from 10 share to 11 per centum. 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 contraction 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 obligati ons (CDO), which derived their value from mortgage payments and housing prices, greatly increased. That kind of financial insane asylum 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 large 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 exclamatory deregulation to encourage business, which resulted in less oversight of activities and less divine revelation of information about late activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the progressively important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. These institutions, as well as certain adju st 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 tingeed the ability of financial institutions to lend, decrease economic activity. The U.S. Financial Crisis Inquiry Commission reported its findings in January 2011. It think that the crisis was avoidable and was caused by 1. Widespread failures in financial regulation, including the federal official 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 explosive alloy of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis 4. discern policy makers ill prepared for the crisis,5. Lacking a full reason of the financial system they oversaw and systemic breaches in accountability and e thics at all levels.3536 Table 1 The Causes and Impacts of Global Financial Crisisinterpreted from Takatoshi Ito equation of the Financial Crises Japan and Asia in 1997-1998 vs. U.S. 2008-09 The Collapse of World TradeAlthough the crisis is in the first place from financial sector, trade had great implication that hit countries around the world. Exports collapsed in nearly every major trading 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 part 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, experience substantial trade contractions, which helped spread the crisis. The collapse in net export in Germany contributed to the decline in their GDP which put the country into recession. In the fourth part shite o f 2008, Germanys leave out in net exports contributed 8.1 percentage points to a 9.4 percent decline in GDP (at an annual rate) Japans 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 widening 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. trustingness levels are measured in different ways across countries, but they were generally falling throughout 2008 and reached recent lows in the fall of 2008 and spend of 2009. As noted, world GDP is estimated to have fallen roughly 1.1 percent in 2009 from the year before.In advanced 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. disrespect the past nature of its collapse, the U.S. economy actually fared better than about half 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 underdeveloped CountriesThe impact of the crisis on create 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 b y 40% in the first six months of 2008. FDI to mainland China was $6.6 billion in September 2008, 20% down from the monthly average in year 2008 so far, and mining investments in South Africa and Zambia have been put on hold.The crisis has led to a drop in confiscate and equity issuances and the sell-off of risky assets in development countries. The average volume of link issuances by developing countries was only $6 billion between July 2007 and troop 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 research suggests some 91 International normal 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 macroeco nomic 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 drive 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 twice 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 response. Its membership is calm of most of the worlds largest economies and makes up nearly 90 percent of world gross national product. The first G-20 leadership summit was held at the peak of the crisis in November 2008. At that point, G-20 countries attached 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 go in GDP and trade. Leaders 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. perchance the most notable act of world coordination was the decision to provide substantial new funding to the IMF. U.S. leadership helped sec ure a commitment by the G-20 leaders to provide over $800 billion to fund multilateral banks broadly, with over $500 billion of those funds 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 durable recovery is secured, and committed to avoid premature withdrawal of stimulant drug. They launched a new Framework for Strong, Sustainable, and Balanced Growth 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 a ctions to increase capital in the system. It set up emergency lines of credit (called Flexible Credit Lines) with Colombia, Mexico, and Poland, which in total are worth over $80 billion.These lines were intended to provide immediate liquidity in the event of a run by investors, but also to polarity 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 speciateing (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 keep back sustained currency crises in many emerging nations.The Government ResponsesThe U.S. executed two stimulus packages, totaling nearly $1 trillion during 2008 and 2009. The U.S. Federal Reserves new and expanded liquidity facilities were intended to enable the central bank to fill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening 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, expanded regulation of the shadow banking system and derivatives, and enhance 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 central 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 method 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 investing internationally in emerging markets.The bank bailout, more formally called the Troubled Asset ministration Program, failed t o achieve the last goal. The goal of these bailouts from the position of the largest financial institution is billions of dollars in taxpayer money allowed institutions that were on the brink of collapse not only to survive but even to flourish. The legislation that created TARP, the Emergency stinting 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 seek 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 polic y or effort to force the extension of credit. there were no strings attached no requirement or even incentive to increase lending to home buyers, and against our strong recommendation, not even a request 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 prudence 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 co mmodities. 4. People erroneously equated free markets with unregulated markets. 5. form _or_ system of government makers should be flexible in their policies and point 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. Muslim based economy system has great opportunity to alter the existing financial system. Moslem 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 developed countries is even worse. This uneven and unjust system of dissemination needs to be re formed on a conceptual basis. The ideal world today is crying on the present financial crisis, but few people have realized that this is basically a crisis of rich people 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 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. Social justice includes three aspects, that is to say 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 developing by the strong.The debt burden, however, is increasing inequality between rich and poor countries and is equal to exploitation. It also means that poor countries are often unable to provide the most basic services for their citizens. The huge debt that currently burdens poor countries has arisen from loans that have charged interest and have not shared risk between the lender and the borrower and have, therefore, contravened the two most fundamental principles of Islamic finance. Islamic commands to intermit from charging interest and to share financial risk seek to avoid the immersion of wealth and the economic exploitation of the weak and thereby hold open situations such as the current debt crisis from arising in the first place. The core intuitive feeling 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 leafy vegetable experiences (takaful) which implies that debts cannot be repackaged and re sold as assets globally to faceless investors while profit must be redistributed directly to the poor (zakat) in the Holy month of Ramadan to build and strengthen social safety nets through institutions of charity wellbeing and education. Over and above zakat, all Moslems 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 unsophisticated 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 composition poverty during an economic crisis creating the new poor among the Moslem works classes and abnormally high repayment rates through un authorise 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.Currently four Isl amic financial institutions, Bank Rakyat (The Peoples Bank) the Yayasan Pembangunan Ekonomi Islam Malaysia (Islamic Foundation of Economic Development, Malaysia) Permodalan Kelantan Bhd (Kelantan Investment Co.) and the Agro bank offer such services to the rural and urban working classes. It has established an Ar-Rahnu XChange Franchise 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 constant pawn-broking market, there seems to be few alternatives just to expand the Ar-Rahnu market among Muslims and non-Muslims and charge the poor for safekeeping 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 th an 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 the desperately poor.This profitable 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 middle classes for eudaimonia 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 benefit based institutions such as free or subsidised education, health and child care, education, and even publicly directed employment. Its principles may differ from modern benefit economics 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 countries are more Islamic than regular, except they are part of the post-colonial meliorist policies of Muslim states which preceded the modern up-beat drive towards Syariaah compliant finance. Islamic finance, however, has not show 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 appreciated 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 panoptic amount of goods and services to be produced, without the worry of serving loans. One, however, has to be aware 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 operative today proceed whether or not there are institutions of Islamic finance in the country. In Malaysia, Brunei, and the MENA countries discus sed 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 bequest 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 privilege 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 barely any data on how the profits earned by large corporations of Islamic finance actually become i nstituted 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 outweigh the call for greater transparency in the use of national collections of zakat and so on. legion(predicate) Muslims in Malaysia pay both income tax and zakat, rather than ask for privilege from income tax. They also maintain Islamic voluntary organizations with personal funds, donate to mosques and charities, and make endless food contributions to orphans and the poor. There is very little data garner 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 sympathetic institutions.On the other hand, Muslim based banking and financial institutions are taint 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 contain more humanistic principles of investment and redistribution of profits except that there is a abs entminded 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 Malaysia, Brunei, and the MENA countries of the Middle East and North Africa, state agencies assume trusteeships over compulsory 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 broaden 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 spendi ng 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 screen 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 waked 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 such 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 government 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 render 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, Brawij aya UniversityFederal speechless 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.muftitaqiusmani.com/index.php?option=com_content& ruling=article&id=41present-financial-crisis-causes-and-remedies-from-islamic-perspective-&catid=12economics&Itemid=15, imagine on 11 November 2012 http//www.academia.edu/1133515/Global_Financial_Crisis_An_Islamic_Perspective, echo 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. daybook of Economic Perspective.25 (1). Pg 71-90. IbidRecovery from the Asian Crisis and the Role of t he 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_Financial_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 . 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Taken from http//en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008cite_note-IMF_Loss_Estimates-31 19 . Ibid 20 . Greenspan-We indigence a Better Cushion Against Risk. Financial Times. March 26, 2009. Taken from http//www.ft.com/cms/s/0/9c158a92-1a3c-11de-9f 91-0000779fd2ac.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 WORLD ECONOMY. Taken 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