Financial Crisis Recovery Essay Example for Free

mo exculpateary Crisis Recoery Essay1997-1998 monetary CrisisThe weaknesses in Asiatic pecuniary systems were at the root of the crisis that caused galacticly by the lack of incentives for effective encounter management created by implicit or explicit government guarantees against failure. The weaknesses of the fiscal field too were m take ined by rapid growth and accentuated by deep uppercase inf scummys, which were sectionly encouraged by pegged commuting grade. In the mid-1990s, a series of external shocks began to change the scotch environment the devaluation of the Chinese Renminbi and the Japanese Yen, emerging of U. S. involvement rates which led to a strong U.S. dollar, the sharp decline in semiconductor prices unbecomingly affect their growth. The crisis began in Tailand when the Thai baht crease of in July 1997 with a series of speculative attacks on the baht extended afterward quite a hardly a(prenominal) decades of outstanding economic exert ion in Asia. As the U.S. economy recovered from a recession in the advance(prenominal) 1990s, the U.S. Federal Reserve marge under(a) Alan Greenspan began to raise U.S. interest rates to brain off inflation.This made the U.S. a more attractive investment destination relative to Southeast Asia, which had been attracting hot m oney flows through with(predicate) with(predicate) lavishly short-term interest rates, and embossed the value of the U.S. dollar. For the Southeast Asian nations which had currencies pegged to the U.S. dollar, the broad(prenominal)er U.S. dollar caused their own exports to become more expensive and slight competitive in the global marketplaces. At the same time, Southeast Asias export growth slowed dramatically in the spring of 1996, deteriorating their current account position. Mevery economists believe that the Asian crisis was created non by market psychology or technology, but by policies that distorted incentives within the lenderborrower relat ionship. concussions of the crisis to the South eastside AsiaMost of Southeast Asia and Japan having money depreciation, devalued line of descent markets and former(a) addition prices, and a precipitous break in private debt. It were resulting large quantities of impute became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level. These asset prices suitually began to decay, causing individuals, fiscal institutions and corporations in the affected countries were slangrupt. A change in market sentiment could and did lead into a violent of silver depreciation, insolvency, and expectant outflows, which was difficult to stop. In the year after collapse of the baht peg, the value of the just about affected East Asian currencies fell 35-83% against the U.S. dollar (measured in dollars per unit of the Asian bills), and the most serious stock declines were as great as 40-60%. Lenders led to a large withdrawal of credit fro m the crisis countries, causing a credit crunch and further wedgeruptcies. external investors attempted to withdraw their money the stand in market was flooded with the currencies of the crisis countries, putting depreciative pressure on their alternate rates. As a result, short-term economic activity has slowed or contract severely in the most affected economies like inflation and rising in unemployment. It impossible that the government doing nonhing when the crisis happened to their country. To interdict currency values collapsing, countries governments brocaded fiscal spending in domestic interest rates to exceedingly high levels (to friend diminish flight of working capital by making lending more attractive to investors) and to intervene in the exchange market, buying up any excess domestic currency at the pertinacious exchange rate with remote reserves.But when interest rates were very high, it raft be passing damaging to an economy that is healthy, wreaked further havoc on economies in an already fragile state, composition the central banks were hemorrhaging foreign reserves, of which they had finite amounts. As a system to maintain competitiveness, policies to strengthen the countrys balance-of-payments account were pursued. For example, exports were encouraged and imports were discouraged, the latter through an ontogeny in import taxes on certain(prenominal) goods and services. Measures to increase exports for providing handouts this instant to commonwealth affected included reducing the cost of doing business through such means as tax incentives to boost the manufacturing, agriculture, and services sectors.In the parapraxis Malaysia for example, on that point argon policies regarding 1997 crisis Denial and hesitation, the Malayan government denied that there was a crisis in the first place Tight fiscal and monetary policies, and restructuring the banking system political science proposed to use regional currencies instead of the U S dollars in inter-ASEAN bilateral condescension and Financing the recovery programs with the total cost of all measures was RM62 one million million million. While in the upshot of Indonesia, the government providing assistance to the deplorable like efforts to shield poor and vulnerable sections of society from the worst of the crisis, by deepening and widening social safety nets and devoting unassailable budgetary resources to increasing subsidies on basic commodities such as rice measures to increase transp bency in the financial, corporate, and government sectors and steps to improve the efficiency of markets and increase competition.Another example of service the poor and needy, government must be fair and redistribute the wealth equally to them according their basic necessities of life. In Malaysia, the practicing of zakat system and waqaf contribution to jock the poor and needy indirectly pass on benefit the society. Moreover, Bank Rakyat and ar-rahnu market on Mosl em pawn-broking will help the small and intermediate tapeprise to expend their business. Government also must allocate the budget expenditure for subsidizing mainly on education, healthcare and housing for the peck. The Inter internal monetary computer memory (IMF) is an global organization that abides financial assistance and advice to genus Phallus countries. It was created out of a need to prevent economic crises like the Great Depression. With its sister organization, the World Bank, the IMF is the largest habitual lender of funds in the population. It is a specialized agency of the joined Nations and is run by its 186 member countries.Membership is open to any country that conducts foreign policy and accepts the organizations statutes. The IMF is responsible for the creation and maintenance of the world(prenominal) monetary system, the system by which international payments among countries take place. A core responsibility of the IMF is to provide loans to member co untries experiencing actual or potential balance of payments capers. This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while under taking policies to right-hand(a) underlying problems. Unlike ripening banks, the IMF does not lend for specific projects. It therefore strives to provide a systematic mechanism for foreign exchange transactions in order to foster investment and promote balanced global economic trade. To achieve 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 financial sector and its regulatory policies, as well 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 n ations 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 ar assertd 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. The IMFs constituent 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 yearly 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, whether 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 deple tion of the nations foreign reserves. In return for the IMFs help, a country is usually required to embark on an IMF-monitored economic reform program, other than known asStructural Adjustment 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 attack corruption. These policies may cause short term pain, but, are essential 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 charge 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 time, thanks to the unique character the IMF can play, the costs involved for the creditor countries seem to be instead limited, as the opportunity costs of forgoing the proceeds of alternative investments are relatively small. By temporarily providing finance and at the same time fostering adjustment, member countries could flood out external problems without overly detrimental measures either for their own population or for other countries. The interest rates aerated by the IMF in normal circumstances can be relatively low, because the special role of the IMF in the international financial system reduces the risk of infections for the IMF itself as well as for the creditor countries which have provided the resources. Because of its special position the IMF can mitigate the risks attached to its loans.Helped by its low fundin g costs, the IMF can charge debtor countries lower interest rates than private sector participants which have 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 bad human rights temperament. On giving loans to countries, the IMF makes the loan conditional on the slaying of certain economic policies. These policies tend to involve * Reducing government borrowing Higher taxes and lower spending * Higher interest rates to stabilize the currency.* set aside 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, legion(predicate) countr ies such as Indonesia, Korea and Thailand were required by IMF to pursue tight monetary policy (higher(prenominal) interest rates) and tight fiscal policy to reduce the budget famine and strengthen exchange rates. However, these policies caused a minor slow down(a) to turn into a serious recession with mass unemployment. The IMF have been criticized for imposing policy with little or no chatteration 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 path in Washington should dictate the economic conditions of life to 75 developing countries with virtually 1.4 billion people. Because the IMF lends its money with strings attached in the form of its SAPs, man y an(prenominal) 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 facing economic failure. Debtor countries to the IMF are often set about with having to put financial concerns ahead of social ones. Thus, by being required to open up their economies to foreign investment, to denationalize globe enterprises, and to cut government spending, these countries suffer an inability to properly fund their education and health programs.Moreover, foreign corporations often exploit the situation by taking advantage of local cheap labor while showing no regard for the environment. The ambitional groups say that locally cultivated programs, with a more grassroots onward motion towards development, would provide greater relief to these economies. Critics of the IMF say that, as it stands now, the IMF is only deepening the rift mingled with the wealthy and t he 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 trim down 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 about which countries may borrow money are made by rich 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 poverty. The livelihoods of people in poorer countries are destroyed by unfair competition 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 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 stood their grounds and refused to devalue which readiness have prevented a global financial crisis. Other aspects of the handling of the case that were looked down upon were the issue of the bail-out and the political situation of the borrowing country had once again been ignored. Thailand had already borrowed from the IMF and they were bailed-out very publicly which gave an incentive for surrounding countries to follow very wild projects or decisions, believing that the IMF would be a safety net as opposed to a len der of closing resort.This is what happened in South Korea when large, unprofitable investment projects were undertaken, 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 plaque, where bad banking, nepotism and corruption do not help create stable and efficient economies. During August December 1997, the International Monetary Fund signed three necessity lending agreements with Thailand (August), Indonesia (November), and Korea (December). These programs established packages of international financial support at an unprecedented cumulative sum of approximately $110 billion, based on the financing commitments. During the period August to December, the IMF programs failed dramatically to meet the fair game of restoring market confidence.In all three countries, the exchange rate was expected t o stabilize, but in fact quickly depreciated far below the targets set in the program, and this despite a very sharp increase in interest rates. Foreign investors remained unconvinced about the debt servicing capacity of the private debtors despite the proclaimed 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 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 original lending agreements Indonesia was deeply affected by the 19971998 crises, more so than its East Asian neighbors. Its economic contraction was deeper and more prolonged.It was the only one to experience a (temporary) loss of macroeconomic control. Eight long time 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 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 prescript ions 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 between the IMF and Suharto, the government revoked subsidies for food, and raises the price of oil 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 announced 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 ha s continued since the crisis in 1997.2008 monetary Crisis Triggered by events in The US and EUThe cause or trigger of the 2008 global financial crisis was the boom of the United situates housing bubble which peaked in approximately 20052006. Since banks began to give out more loans to potential space owners, housing prices began to increase. The increase in house price and improvement of construction activity started around 1992. At that time the Federal Reserve was holding its policy interest rate at an unusually low level by the standards of the past few decades. The good generation lasted until 2005, when monetary policy was tightening after another(prenominal) spell of low interest rates. Over that period, construction activity contributed 1/5 partage points annually to the growth rate of substantive gross domestic product, and the component of employment in construction and finance, out of the total workforce, rose 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 contraction in construction transpired to wind down the inventory overhang, which is often a feature of economic slowdowns and recessions. In addition to that, behind 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 kind 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 an d 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 unfermented activities undertaken by banks and other evolving financial institutions. Thus, policymakers did not immediately recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. These institutions, as well as certain regulated banks, had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses.These losses impacted the ability of financial institutions to lend, slowing economic activity. The U.S. Financial Crisis In quiry Commission 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 explosive 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. deficient 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 Financial Crises Japan and Asia in 1997-1998 vs. U.S. 2008-09 The Collapse of World TradeAlthough the crisis is originally from financial sector, trade had great implication that hit cou ntries 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 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, experienced 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 quarter of 2008, Germanys drop 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 Output Around the GlobeThe financial crisis was rapidly familial 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 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. Despite the historic nature of its collapse, the U.S. economy actually fared better than about half of OECD economies during those quarters. The decline in industrial ware across major economies, each of these economies in January 2009 was more than 10 percent below its Ja nuary 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 six months of 2008. FDI to 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 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 research 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 driven predominantly by non-tradeables rather than tradeables, and, although the crisis trim growth across the board, sectors such as embark and communications, and utilities have continued to grow in double digits. At the same time, the tradeable sector which has performed better 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 composed of most of the worlds largest economies and makes up nearly 90 percent of world gross national product. The first G-20 leading crown was held at the peak of the crisis in November 2008. At that point, G-20 countries connected 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. Leaders of the worlds largest economies pledge 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 notable 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 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 th e 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 stimulus. They launched a new Framework for Strong, Sustainable, and equilibrate 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 actions 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 signal to the markets that funds were available, making a run less likely. In each of these countries, markets responded positively to the promulgation 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 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 fulfill 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 tractableness 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 necessitys, expanded 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 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 Relief Program, failed to achieve the ultimate goal. The goal of these bailouts from the perspective of the largest financial institution is billions of dollars in taxpayer money allowed institutions that were on the shore of collapse not only to survive but even to flourish. The legislation that created TARP, the Emergency sparing Stabilization Act, had far broader goals, including protecting home values and preserving homeownership. sexual congress was told that TARP would be used to purchase up to $700 billion of mortgages and to obtain the necessary votes, Treasury expectd 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. 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 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 account 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. form _or_ system of government makers should be flexible in their policies and guided by overall national objectives. 6. altogether 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.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 developed countries is even worse. This uneven and unjust system of distribution needs to be reformed on a conceptual basis. The entire world forthwith 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 scads 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 eonian crisis all the times, but no on e care for them, The present crisis should not be examined within the relatively narrow confines of debt rather, it is fundamentally a promontory of social justice, a concept that is paramount in Islam. Social justice includes three aspects, namely a fair and equitable distribution of wealth the furnish 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 equivalent 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 selld risk between the 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 av oid 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 faceless investors while profit must be redistributed directly to the poor (zakat) in the dedicated month of Ramadan to build and strengthen social safety nets through institutions of charity offbeat and education. Over and above zakat, all Muslims pay zakat fitrah to the poor, during the month of Ramadan, either through state collection centers or direct contrib utions 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 working 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.Currently 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 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 th e country, managed by reputable cooperatives of the working classes. Given the acute dependance 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 merely 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 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 the 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 reg ular income earners among the middle classes for welfare driven services and products and unreadable 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 subsidize education, health and child care, education, and even publicly tell employment. Its principles may differ from modern welfare 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 reformist policies of Muslim states which preceded the modern up-beat drive towards Syariaah compliant finance. Islamic finance, however, h as 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 appreciated value of assets and services as forecasted and create 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 services 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, f rom 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 straight off 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 bread earned by big 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 significa nt 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.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 personal funds, donate to mosques and charities, and make endless food contributions to orphans and the poor. There is very little data pull together on the actual amounts paid privately or anonymously and state-directed contributions, although i ncreasing, 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 obscure 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 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 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 priv ate 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 o f 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 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 leve l of employment and production will increase. Meanwhile, banks will bail out to husband 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 earn 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_contentview=articleid=41present-financial-crisis-causes-and-remedies-from-islamic-perspective-catid=12economicsItemid=15,retrieve on 11 November 2012 http//www.academi a.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_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 Francisc o 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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