ASSIGNMENT # 1

SUBMITTED BY:
SARA AKBAR (20021554-006)
SUBJECT:
FINANCIAL SYSTEM & BANKING REGULATION
COURSE CODE:
COMM-206
DEPARTEMENT:
BS BANKING & FINANCE (3RD SEMESTER)
SUBMITTED TO:
SIR MUHAMMAD AHSAN MUKHTAR
 GLOBAL FINANCIAL CRISIS 1929 & 2008

FINANCIAL CRISIS:
Financial crisis is a situation in which the value of assets suddenly falls or
there is a decrease in the value and price of assets.

➢ It is happened during some emergency situations when investors

withdraw money from their saving accounts because they don’t
want to lose their assets value by keeping them in that institution
(financial) due to which the situation of financial crisis occurs.

➢ There can also be a lot of other reasons/causes due to which

financial crisis occur which include:

i. Crashing of Stock Market

ii. Failing of government in paying country debts
iii. Decrease in the country currency value
And many other reasons are included which can be a major
cause of financial crisis.

➢ Financial crisis may be associated with only banks or can be spread

throughout a single economy.
STAGES OF FINANCIAL CRISIS:
There are three stages of financial crisis:
i. Beginning of crisis which is caused by failure of institutes,
mismanagement, and regulations.

ii. Second stage start with the financial system breakdown.

iii. And then in final stage (3rd stage) the asset value start declining.

Global financial crisis of 1929:

Introduction:
➢ Global financial crisis also known as the great depression was
happened in America (US) in 1929 when the value of stock asset
began to fall.

➢ During this period the estimated fall of GDP globally was almost
15%.

➢ Its period was from Aug1929-March1933.

Causes/Reasons of depression 1929:

➢ According to past chairman of federal reserves, the capital bank was
the cause of creating great depression due to use of strict monetary
policies.
 ➢ Due to continuous increase in federal rates was also a major cause
of depression of 1929.

➢ Federal didn’t increase money supply to battle with deflation.

➢ Interest rates didn’t increase to preserve dollars.

➢ Investors withdrew all the investments and savings from banks

which lead to the bank failure and thus the situation of panic
happened.

➢ Between 1929-1933 the death rate was increased to 22.8%.

➢ High interest rate & debts

➢ Panic in the stock market.

Difference b/w 1929 & 2008 financial crisis:

1929(great 2008(great recession)
depression)

Price level Price level fall by Price level rose at the

22% low rate
Real GDP GDP fall by 31% GDP fell by less than
4%

Definition Extreme economic Economic downfall

downfall spread to the other
economy

Time period Remain for years Period of some

months or quatres

State response Taxes increase, Plans to relief the

decrease in spendings states by fiscal reliefs

Unemployment Unemployment was Unemployment rate

rate 25% was 8.5%

Measures Measured by the gross It has not specific unit

domestic product of measure.
Effects Directly effect Commonly effect the
economy on large paper wealth
scale

Similarities b/w the global financial crisis of 1929 & 2008:

➢ During both the financial crisis of 1929 & 2009 there was a great
downfall in the value of the money which is the similarity of
financial crisis.

➢ Both effect the economy in long term. The period of 1929 was large
that last for almost 3-4 years. Whereas the period of 2008 was 16
months.

➢ In 1929 & 2008 crisis the main loadstone (center of focus) was NEW
YORK stock market.

➢ The unemployment rate during this crisis was very high. Large
amount of people lost their jobs and death rate also increased.

➢ Both caused of panic situation in the banking and economy as the

money that holds the loans fall in the value as investors withdrew
their money.
➢ 1929 all depositors lost their money but in 2008 FDIC saved some
depositors from loss of their money.

➢ Financial system totally collapsed during 1929 &2008.

➢ Value of revenue and real GDP effect badly.

Banking panic:

➢ Banking panic occurs when people hear about the banks failure and
loose their trusts in the bank, they start getting their money out from
the banks and assets value decrease.

➢ When banks fail people lose access to their credits, due to lose of
credit and decrease in depositors the economy of the country suffers
badly.

Introduction of 2008 great recession:

Recession is drop in economy for almost two consecutive quarters

later it got rejected and said that the recession usually last for some
months and have great impact on the overall economy.

Reasons for 2008 financial crisis:

➢ The main reason for this was that the investors and public lose
their trusts in investment and financial market institutions.
➢ The crisis like these ends when government and financial system
restore their interest in the investors and public.

➢ Bubbles: increase in the price asset value. Its is not fundamental

increase in the price value but people think it will increase.

➢ Toxic assets: assets that don’t have any function in the marketing
after their price fall.

➢ Break down: housing market breakdown was also one of the main
reasons for great recession of 2008.

➢ Banking crisis was one of the main reasons for great recession of
2008.

➢ Excessive loans: businessman, investors and government take a lot

of loans and debts called as over trading is main cause of great
recession of 2008.

➢ Higher interest rates

➢ Globalization

➢ Increase in oil prices

Q. How the great depression of 1929 resolved?

 ➢ The great depression of 1929 was resolved by the combination of
World War 2 and the new deal which lifted the US out of the
depression.

➢ Economy recovered by the stability of banking system,

demolishing the gold standards.

➢ Federal policies to increase the supply of money in the economy.

➢ The great depression of 1929 was ended in the 1940s.

➢ 28.6% increase in the private savings stabilize the banking system

and the economy.

➢ Lessen of government spending was also a major cause of end of

great recession.

Recovery from the great recession of 2008.

➢ Wall street plan and consumer protection act was given to recover
from the effects of great recession of 2008.

➢ A bailout plan was given by the congress for the troubles banks to
solve the issue of great recession.

➢ Economic stimulus plans were given to cope with the damage of

recession.

➢ during this period the unemployment rate became very high but
with the policies unemployment rate become under control and fall
 by 4% in 2019, 10 years after the great recession fast recovery was
made by the government.

Summary of the 1929 & 2008 financial crisis:

➢ If we simply talk about financial crisis the 1929 crisis was most
severe and effecting than the 2008.

➢ 1929 affect people on large scale (unemployment) also had its

long-term impacts on the economy.

➢ The main cause of crisis was the wrong federal and government
policies due to which the overall banking system break.

➢ Due to breaking of banking system people lose trust and

confidence in the banks. They withdrew their money/assets from
the banks in fear to lose the assets value. After which the value of
assets starts declining the value of assets decrease and economy
suffer in long term.