Reduce effects of Sub Prime Mortgage Crisis

1.1 Definition

Subprime mortgage exist to supply loan to those borrower who are non measure up for the conventional mortgage. It is a type of mortgage which is granted to the borrowers with hapless or lower recognition evaluation ( Edoardo Turano, 2006 ) .Generally, it offers interest-only loans because it is easier to afford. The loan does non necessitate any rule to be paid in the few several old ages of the loan. Borrowers are ever in the hope that they can do the payment before any rule is subjected. This will cut down their monthly payment. If they can non carry through the payment, they are normally defaulted since they can non do the higher payment ( Amadeo. K, n.d. ) .

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Individual who have a fiscal job before are classify in the group of higher hazard and hence they have a greater troubles to obtaining recognition, particularly for big purchase such as house and auto. These single may had lost their occupation, medical issue, low income, big loans relative to the security belongings or any other unpredictable event which will do a major reverse in finance. As a consequence, late payment or foreclosures will go on. Lender with subprime mortgage bears the higher hazard. In order to protect themselves from confronting excessively many losingss, subprime loaner charge involvement rates above the premier loaning rates ( Edoardo Turano, 2006 ) .

1.2 Historical and background

Subprime mortgage industry has grown in the twelvemonth 1990 ( wikinvest, 2010 ) . The recognition market is evolved towards more efficiency. Subprime imparting evolved with the realisation of a demand in the market topographic point for loans to higher-risk borrowers with imperfect credits history.

The subprime was originates in the twelvemonth 1993. The low involvement rate and escalating of place monetary value have conveying many companies enter into the market. The market had enjoyed the unchecked growing and profitableness, but the current environment is become more competitory. However, through these old ages the concern had experienced the attractive of profitableness in the early old ages and follow by the dyspepsia decrease in net income border in the latest twelvemonth ( n. a, 2006 ) . Alternatively of acquiring lower, the subprime mortgage turn higher and higher. The deepest subprime mortgage falls in the twelvemonth 2009. In twelvemonth 2009, gross domestic merchandise in the state is in the negative mark. This shows that the state is in the enormously bad state of affairs. Market participant should take enterprise to stress on cost control and cost decrease ( n. a, 2006 ) .

1.3 Drivers of subprime loaning

Home monetary value that appreciate since the mid-1990 ‘s until today is seem to be unchangeable tendency. This make the single assume that the place monetary value will ever keep in the same degree or even acquiring higher. Individual predict that they will acquire net income if they do the investing. This make them countervail the hazard that they have to bear when they make the subprime loaning ( wikinvest, 2010 ) .

Adjustable-rate mortgages and involvement rates had brings the development of subprime loaning. Towards the terminal of 1990s and the mid-2000s, ARMs is become popular in the United States mortgage market particularly in the subprime loaning. ARMs provide the characteristic of variable involvement rates. Subprime lender start to advance ARMs as to replace the traditional fixed involvement rates imparting. It is a annoyer that misdirecting the subprime borrowers with the premise that they are paying lower involvement rate ab initio. Weaponries can be benefit to borrowers when the involvement rate falls after the loan inception. Though, borrowers are still need to bear with higher loan rates and monthly payment when the involvement rate additions. With the steadily increasing of involvement rates for continuously few old ages, it may establish that borrowers are unaffordable with the payment and loaner are profitable. As a consequence, when there is foreclosure of subprime mortgage rate drastically, loaner will confront the fiscal troubles or even bankruptcy ( investopedia, 2010 ) .

In add-on, the lax loaning criterions besides drive the subprime loaning until today. Two decennaries ago, subprime borrower will be denied recognition because loaners are restricted by the asperity loaning criterions. The jurisprudence prevented lender to bear down high involvement rate to counterbalance the hazard the bear. However, the acceptance of the Depository Institutions Deregulatory and Monetary Control Act in 1980 eliminated rate caps and made subprime loaning more executable for loaners. The addition credence of securitized merchandise means that the loaner is taking lesser hazard comparison with earlier. Lenders are begins to take down their demand when the criterions fell. Furthermore, when they are more investor demand for loaning, there will be capital constrained and unable to run into the demand. This will besides makes the investor to hold higher-yielding securities which could merely be conveying out by the issue of subprime loans ( wikinvest, 2010 )

1.4 Effectss to the economic system

The universe economic system has been turning up at a rate unmatched since the 1970s. Due to that, Malayan economic system has grown quickly together with the universe economic system. Although, the happen of the sub-prime mortgage crisis presently threatens to derail the planetary fiscal system and the economic halt to turning after this. This late state of affairs had threatens and provides a disputing avenue to which the Malaysian fiscal system and economic system would be stress-tested by negative external forces. Amidst the fiscal convulsion and partial nationalisation of fiscal houses, Malaysia ‘s fiscal system appears to be resilient ( Jamesesz, 2009 ) .

As stock market around the universe circulate from the chance of a U.S. economic recession, and banking establishment is the chief economic sciences suffer great losingss from their investing in securities that are backed by sub-prime mortgage in the U.S. , the Malaysia economic system in the face of all these planetary economic sufferings, stands recoil back.

Though confronting the troubles, U.S. is still remains to be the largest trading spouse with Malaysia. The current recession state of affairs of U.S. might misdirect others that U.S. state of affairs would negatively impact Malaysia. However, existent state of affairs reveals that Malaysia had lessened the dependance on the U.S. as a consumer of Malaysia goods. Others than that, trading between Malaysia had with China and European Union had been increasing over U.S. in the past few old ages. Gross exports by Malaysia to the U.S. have bit by bit declined from 18.8 per centum of Malaysia ‘s entire gross export in 2004 to 16.1 per centum in the first nine month of twelvemonth 2007.

Besides, Malayan Bankss do non acquire impact from the sub-prime mortgage crisis in the U.S. , as the corporate exposure of Malayan bank to the sub-prime mortgage-backed CDOs is estimated to be less than US $ 100 million. With the strength and features of Malaysia, we do believe that Malaysia economic system is able to defy the awaited lag in planetary economic growing ( Washington Times Global, 2009 ) .

2.0 Literature Review

2.1Gross Domestic Merchandise

2.1.1 Introduction to GDP

Harmonizing to McConnell, Brue and Flynn ( 2009 ) , Gross Domestic Product can be defined as the market value of all concluding goods and services make within states during one year.GDP can be divided into nominal GDP and existent GDP. Nominal Gross Domestic Product is measured by utilizing current monetary value while Real Gross Domestic Product calculated by the basal twelvemonth monetary value. Nominal GDP will hold job that is the GDP will lift twelvemonth to twelvemonth but end product did non increase. Real GDP solve the job of nominal GDP by rectifying the monetary values. From Real GDP, it compares existent figure of twelvemonth to twelvemonth which can cognize clearly and real property alterations in end product.

GDP can be measured by two basic ways that are expenditure attack and income attack. Harmonizing the theory, the outgo attack step by entire up all cost that used on concluding goods and services. Those passing include Personal ingestion outgo ( C ) , Gross Private Domestic Investment ( Ig ) , Government purchases ( G ) and net export ( Xn ) ( McConnell, Brue and Flynn, 2009 ) . C is ingestion by single or family ‘s expesenses includes goods ( lasting or non-durable ) and services. Ig refers the disbursement on all capital goods. G is passing on public goods and services by authorities while Xn is cost that used in purchase the merchandises and service make within state. But in Malaysia, outgo attack consists of private outgo, public outgo and import and exports of goods and services. The private and public outgo can foster split to investing and ingestion ( Economic Planning Unit, 2010 ) .

Another method to mensurate GDP is income attack. It numbering up all income includes compensation of employee, rents, involvement, owner ‘s income, corporate net incomes and revenue enhancement on production and imports ( McConnell, Brue and Flynn, 2009 ) . Compensation of employee is rewards or wage of labour service. Rents are income from belongings or other rental inputs. Interest is the family receive from loan. Proprietor ‘s income is income from integrated concern.Corporate net incomes is net income of corporation ( McConnell, Brue and Flynn, 2009 ) .

Besides that, GDP besides a index of a state ‘s economic system growing whether in good or bad status ( Investopedia, n.d. ) . GDP can has big influence toward economic. Economic growing can be defined as either an addition in existent Gross Domestic Product ( GDP ) or an addition in existent Gross Domestic Product ( GDP ) per capita ( McConnell, Brue and Flynn, 2009 ) . It is calculated as a per centum rate of growing per twelvemonth. Generally, the expression below was used to mensurate the economic growing in a state ( McConnell, Brue and Flynn, 2009 ) :

Real GDP current – Real GDP old X 100

RGDP old

Malaysia economic growing has quickly sturdy in the early 1990s. Average of GDP is approximately 7 to 9 % in early old ages. The growing of this few old ages maintain between 5 to 6 % until Malaysia suffer in Asiatic Financial Crisis 1997 and Subprime Mortgage Crisis. ( Dunhill, n.d. ) .Malaysia chief economic is exported goods and services to other states chiefly United States. But late, Malaysia changes their economic theoretical account from export oriented to serve orientated economic system and to more high income state. The state has a stable economic growing will besides has a important good GDP growing.

The Malaysia economic system has much related to United States economic system. When United States faced the lodging bubbles in twelvemonth 2008 and split the monetary value of lodging market ( Dunhill, n.d. ) .United States faced recession on lodging market. Recession is when a GDP growing of a state uninterrupted diminution at least 3 quarters. Malaysia has some important influence from that besides ( Dunhill, n.d. ) . Malaysia faced deeply recession during twelvemonth 1997 boulder clay 1998 on Asia Financial Crisis. Malaysia ‘s GDP influence much by shrivel more 7 % . The recession continue go on in Malaysia in twelvemonth 2001 and twelvemonth 2009.The recession occurred when a state ‘s GDP continue In twelvemonth 2009, Malaysia authorities predicted GDP worsen 3 % and economic experts believe that it will retrieve in twelvemonth 2010 ( Travel Document Systems, n.d. ) .

U.S. Subprime Mortgage Crisis occurred in twelvemonth 2008 and take to one of factor cause recession in twelvemonth 2009. Subprime Mortgage is involvement merely loan offering, easy be afford by many and does non necessitate to pay principal with first few month. The borrower believe themselves that can acquire refinance before paying the principal but mortgage borrower can non afford to pay the monthly payment which keep increasing, they forces to default with high payment and Subprime Mortgage Crisis is occurred ( Amadeo, 2010 ) .

U.S. Subprime Mortgage Crisis has small impact to Malaysia baking ‘s sector. Our impact non much as impact happens in U.S for other sectors, some influence and loss a batch such as fabrication sector. It is no economic factor instead than globalisation factor which cost competition with those lost cost based state ( Dunhill, n.d. ) .

2.1.2Comparison and Analysis of GDP from 2007-2010

2007

2008

2009

2010

GDP ( % )

6.3

4.6

-1.7

8.9

Statistic Data taken from www.epu.gov.my

Subprime mortgage crisis that happened in United States has been worsen during the twelvemonth of 2007, so being an unfastened economic system, Malaysia and other states are non immune from any crisis, it has a serious negative impact on the economic system of Malaysia. Recession is took topographic point when a GDP growing of a state is traveling negative steeply for at least 3 quarters.A .A Anyway, there are some certain industries that can be registered as a recession like lodging section or fabrication segment.A But overall can be still in positive if other industries do well.A Consumer disbursement is still high and the assurance index besides high boulder clay late December of 2007. For case, building sector has been increasing from -0.5 % to 4.6 % ; excavation is one of the major sector to Malaysia ‘s income, utile in retrieving the economic growing and of import driver to Malaysia income. The per centum of excavation sector has been increasing from -2.7 % to 3.3 % ; services sector has been increasing from 7.3 % to 9.7 % . Since those sectors are still making good, therefore, the recession has no any serious impact on the GDP and the GDP during 2007 is still maintained in positive value.

During 2008, the GDP has dropped from 6.3 % to 4.6 % . The other chief sector which is excavation has dropped steeply which is from 3.1 % to 1.9 % ; services sector besides decrease from 9.7 % to 7.7 % . While another constituent of GDP is net export. The per centum of export during the twelvemonth of 2008 is 0.9 % as the per centum of import is 2.3 % , therefore import is much larger sum than export. Then, it is known as net export shortage. When there is a recession in United States, everyone from United States wishes to salvage money and therefore will diminish their disbursement. When disbursement lessening, export to Malaysia will be cut downing excessively, therefore GDP will be lowered down since export is one of the determiner of GDP.

Why does the positive GDP from the twelvemonth of 2008 turned to negative GDP during the twelvemonth of 2009? It is because the crisis that caused by subprime mortgage has continuously cut downing the income of Malaysia while maintaining the outgo higher and higher due to the stimulation measuring of authorities ‘s economic. First, agribusiness, services and fabricating sectors have been traveling to the recession particularly fabricating sector. Its per centum from positive value bead to negative value. While both of the per centum of export and import bead until negative value. Its per centum of export is -12.3 % and its per centum of import is -10.4 % , therefore import still larger than the sum of export, we can reason that the shortage cyberspace export is still maintained. Since the shortage cyberspace export has became more and more serious, therefore the GDP bend from positive value to negative value.

In the twelvemonth of 2010, current twelvemonth, our Malaysia economic has turned back to better compared to last twelvemonth since the latest GDP measuring for our state is 8.9. it turns the negative value to positive value, evidently, recession is acquiring recover. All of the sectors such as agribusiness, excavation, fabrication, building and besides services have turned to larger per centum in positive value. While about the export and import, although there is still net export shortage, the per centum of both import and export have turned to positive value. Therefore, the income or gross of Malaysia during 2010 is the largest sum compared to the sum of gross last 4 old ages.

Based on budget 2011, there is one high spot which is the extension of income revenue enhancement tax write-off inducement for investors and income revenue enhancement freedom for companies set abouting nutrient production activities until 2015 ( NST, 2010 ) . When the revenue enhancement is decreased, this will pull more and more investors to put in our state therefore may take to growing of our state, Malaysia ‘s economic since foreign investing is one of the determiners to better our economic system. Therefore, our GDP might be improved throughout the twelvemonth of 2011.

Another high spot included in the budget 2011 is Allocation of RM135 million for basic substructure to promote husbandmans engagement in high value agribusiness activities including swiftest nests ( NST, 2010 ) .Since agribusiness is one of the major sector in finding GDP, so the economic system might be improved during the twelvemonth of 2011 when the agribusiness activities are acquiring more and more active.

2.2 Inflation

2.2.1 Introduction of Inflation

In economic sciences, the definition of rising prices is the addition in the general degree of monetary value of the merchandises and services over a period of clip. Inflation rate on the other manus is the step of rising prices, the rate of addition of monetary value index for illustration, Consumer Price Index ( CPI ) . It is the per centum difference rate of alteration in monetary value degree over clip. ( Articlebase, 2010 )

Inflation is measured by comparing two sets of goods at two points in clip, and calculating the addition in cost non reflected by an addition in quality. There are, hence, many steps of rising prices depending on the specific fortunes.

The most good known are the CPI which measures consumer monetary values, and the GDP deflator, which measures rising prices in the whole of the domestic economic system. The predominating position in mainstream economic sciences is that rising prices is caused by the interaction of the supply of money with end product and involvement rates. Mainstream economic expert positions can be loosely divided into two cantonments: the “ monetarists ” who believe that pecuniary effects dominate all others in puting the rate of rising prices, and the “ Keynesians ” who believe that the interaction of money, involvement and end product dominate over other effects. Other theories, such as those of the Austrian school of economic sciences, believe that an rising prices of overall monetary values is a consequence from an addition in the supply of money by cardinal banking governments. ( Trading economics,2008 )

2.2.2 Comparison of Inflation Rate between 5 Old ages ( 2006-2010 ) in Malaya

Beginnings: Data taken from www.epu.gov.my

The rising prices rate in Malaysia was 3.6 % for the twelvemonth 2006 and the undermentioned twelvemonth, a bead of 1.6 % ensuing the Consumer Price Index ( CPI ) for the twelvemonth of 2007 become 2.0 % . This bead shows the strength of the Malayan economic system as the rising prices rate stable down. The Malayan economic system was stronger and more resilient. ( BNM, 2007 ) The effects of the subprime mortgage were non demoing yet. However merely a twelvemonth subsequently, the CPI spike up and had risen to a astonishing 5.4 % . It ‘s the direct consequence of the subprime crisis to the Malayan economic system. The undermentioned twelvemonth nevertheless, the rising prices rate recorded the lowest for the 5 old ages and a mild upward tendency on the estimated rising prices rate for 2010.

The cut down in rising prices rate is mostly affected by the stronger growing in Malayan economic system for the concluding one-fourth of the twelvemonth. Both private ingestion and gross fixed investing grew faster in 2007 than in 2006. Besides that, private ingestion increased its growing rate from 7.1 % in 2006 to 10.7 % in 2007. The growing in investing in Malaysia besides increased from 7.9 % in 2006 to 9.5 % in 2007. Government ingestion besides increased its growing rate from 5.2 % in 2006 to 6.5 % in 2007. Furthermore, the overall growing rate of domestic demand increased from 7.0 % in 2006 to 9.7 % in 2007. The stronger public presentation of domestic demand helped maintain the GDP turning at a similar rate than the twelvemonth before in the face of an of import bead in the rate of growing of exports, from 7.4 % in 2006 to 2.1 % in 2007. All these resulted to a lower rate of rising prices for 2007. ( UNESCAPE, 2008 )

In the twelvemonth 2008 nevertheless, it is recorded a important rise in rising prices rate. This is cost push rising prices as the authorities decides to increase subsidies of oil and gas but raise the ( route ) toll rates, and the demands for menu hikings from public conveyance operators are granted. This is to ease the rising prices that has to a great extent impacted the people. ( Funsupermart, 2010 ) The subprime mortgage that affected America ‘s economic system proves to hold a Domino consequence as state all around the universe face a planetary economic system crisis. The lone state that was non affected was Bangladesh as they are a reasonably independent state. ( Trading economic, 2008 ) Peoples are more afraid of the effects of the lodging slack, sub-prime loan crisis and recognition crunch in the US economic system sloping over to the existent economic system worldwide and of class world-wide rising prices. ( CKTEN, 2008 )

For the twelvemonth 2009, a deflationary scenario occurred towards Malaysia ‘s consumer monetary value index ( CPI ) since June 2009, this is chiefly due to the higher base consequence in the 2nd half of 2008. As at terminal of October 2009, Malaysia ‘s CPI was still within the deflationary district of -1.6 % . The mean rising prices rate for the twelvemonth is 0.6 % . Estimated rising prices rate for the twelvemonth 2010 is 1.9 % . ( Fundsupermart, 2010 )

It is clear that the rising prices rate have shown an upward tendency from 2006 to 2008 as the subprime crisis is taking its toll towards the economic system. However, economic sciences have expected the current province for the twelvemonth 2010 is expected to be looking good.

2.2.3 Exchange rate

2.2.3a The relationship between rising prices and exchange rate

During the subprime mortgage period, the rising prices rate in 2007 is 2.0 increased to 5.4 in twelvemonth 2008. ( EPU, 2010 ) Normally, the rising prices rate increased from 2.0 to 5.4, the currency value besides will impact by the rising prices crisis and so our state currency value will deprecate in its value. ( EPU, 2010 ) .However, our state exchange rate becomes lower against the US dollar. Mention to the chart below ; the exchange rate in 2007 is 3.438 per US dollar. In twelvemonth 2008, our Malaysia ringgit exchange rate is 3.333 per US dollar ( EPU, 2010 ) . This is because of US cardinal Bankss started to shoot one million millions of dollar into the fiscal market in order to do certain that the fiscal market can go on operating every bit good.Therefore, US dollar value will deprecate because of the big sum of money flow into the market and the buying power of the money will be decreased. In twelvemonth 2009, the exchange rate of ringgit Malaysia per US dollar is 3.525 because the subprime mortgage is past and the United Stated economic system starts to retrieve back.

2.2.3b Malayan Government action to cut down the consequence of Subprime Crisis

Besides that, most of the Asiatic states include Malaysia have strengthened their external place which is keeping immense foreign militias, diversifying exports to foreign states and running the history excess during the subprime crisis. As a consequence, Malaysia currency becomes stronger during 2007 and into 2008 our economic system can avoid inflationary force per unit areas, particularly from high trade good monetary values. Furthermore, Malaysia currency value still able to stay stable during the subprime mortgage comparison with United States and certain European states is because of Malaysia had implemented the measuring on the cool belongings markets in recent old ages whenever monetary values threatened to go bubble. As a consequence, Malaysia was able to cut down the impact of subprime mortgage in 2008 such as the lodging bubble in US.

The Inflation rate VS the Exchange rate in Malaysia from 2006- 2009

Beginnings: Data taken from www.epu.gov.my

2.3Unemployment Rate

2.3.1 Definition of Unemployment rate

The labour force consists of people who are willing and able to work ( Economics, 18thEd ) . Those who are employed and unemployed while seeking for occupations are included in labour force. International Labor Organization ( ILO ) defines “ unemployed ” every bit good as persons above a specified age who without work ( non in paid or self-employment ) , presently available for paid employment and actively seeking work. The unemployment degree is defined as the labour force minus the figure of people employed ( merchandising economic sciences, 2010 ) . The degree of unemployment divided by the labour force is the unemployment rate.

2.3.2 Types of unemployment

There are three types of unemployment. Frictional unemployment arises because there are people altering occupations. This may be due to the persons being fired and seeking for occupation or waiting to take the chances. There is ever positive degree of frictional unemployment even when the economic system operates at full capacity although there may be countervailing occupation vacancies ( the Canadian encyclopedia, 2010 ) . Besides, changes over clip in consumer demand and in engineering will take to structural unemployment. Structural unemployment was viewed as a impermanent and non a long-run characteristic of economic development, because the labour market left to its ain left to its ain devices sooner or later ranges equilibrium with full employment ( Persefoni, 2008 ) . IMF states that in recent decennaries it becomes progressively evident that this type of unemployment is neither impermanent nor self-correcting ( 1999 ) . Furthermore, cyclical unemployment is unemployment that caused by a diminution in entire disbursement and the unemployment rate moves in the opposite way as the GDP growing rate. Unemployment raises when the demand for goods and services lessenings and the falls in employment ( Economics, 18th Ed ) . Full employment occurs when there is no cyclical unemployment which means there is merely frictional and structural unemployment.

2.3.3 Data analysis

Beginnings: Data taken from www.epu.gov.my

The unemployment rate in Malaysia was last reported at 3.6 % on September 2010 ( epu, 2010 ) . From twelvemonth 2007 to twelvemonth 2010, the norm of unemployment rate is 3.45 % . The effects of subprime crisis can be shown on the twelvemonth 2009 with the highest unemployment rate when there is a recession with negative growing rate. This proved that the lower the growing rate, the higher the unemployment rate and hence there is a tradeoff between unemployment and rising prices ( Stockhammer, 2004, p.7 ) .

2.3.4 Factors impacting unemployment

Harmonizing to Sathish.k.Paul ( 2010 ) , the higher of unemployment rate can be affected by several grounds such as population, illiteracy and ignorance, or deficiency of occupation. A immense figure of population cause more people are able to be educated, when that were a batch of people being educated while the occupation offer for them are less will do unbalancing and increasing of unemployment rate will happen. For those unrecorded in small town or little town will go illiteracy because unable to supply a good instruction to themselves or following coevals. Some kid has to work since their house income is less. The deficiency of instruction and basic demands cause them feel basic demands are much more of import comparison to instruction. This ignorance will take them unable to happen skilled occupation or unemployed even in industry because industry presents may necessitate accomplishment or basic cognition of instruction to be employed. Although our state have a tonss of development sector, but the deficiency of development in certain industry cause occupation offering are non plenty to run into the population so seeking for occupation. Furthermore, the planetary economic meltdown, many industry affected and face downswing or bankruptcy, this calamity non merely affect industry but besides contract labourers. This lead to high unemployment rate because many labours are losing their work.

2.3.5 Problems caused by unemployment

When that is non plenty skill employment or non plenty occupations available for them, there will increase of unemployment rate and occurs negative consequence. The rich state will go really richer and hapless state go really hapless. So, this may do instability in occupation available between rich and hapless state. Social job will happen such as some unemployed people do non hold income and get down to stealing or robbing other people money ( Sathish.k.P, 2010 ) . Peoples will full of assurance when both money and success in occupation satisfy them. However, assurance will cut down and deficiency of self-pride when they are unemployed. In this instance, unemployed will less assurance and cut down their involvement. When the clip of unemployed acquiring longer, the emphasis for those them will acquiring serious. Unemployed people will non care about their wellness and this leads to unhealthy degree because the emphasis occurs. Another consequence is the losingss of enthusiasm will do the willpower lessening ( Article Base, 2010 ) .

2.4 Current history

2.4.1 Subprime crisis cause recession

The US Subprime Market Crisis has already resulted in US Economy Recession. In January 2008, the US Federal Reserve slashed involvement rates from 4.25 % to 3.5 % . This consequence the biggest nightlong cut in more than 25 old ages ( Rebecca Turner, 2008 ) . In Malaysia, this US Federal modesty is same intending with the Nightlong Policy Rate ( OPR ) . In the age of globalisation, no state can stay stray from the fluctuations of universe economic system. US recession lead by subprime crisis was effects on the planetary economic system. Malaysia is bearing the negative consequence of the US recession. The negative of it can be turn outing by the worsening of Malaysia growing rate. Harmonizing to the tabular array of cardinal economic indexs in Malaysia, we realize that Malaysia ‘s mean quarterly GDP Growth was 1.18 per centum between old ages 2000 to twelvemonth 2010. However, the historical depression of GDP growing rate -7.80 per centum was show in March of 2009.

A state ‘s involvement rates rise and its currency appreciate as foreign investors seek higher returns than they can acquire in their ain states ( William C. Spaulding, 2005-2010 ) . Based on the graph below, when the subprime crisis in 2007 occurs, Federal Reserve of US has really started to take down down its involvement rate to buffer a possible recession. Thus, Bank Negara Malaysia ( BNM ) was face force per unit area to take down its rate to cut down the upward force per unit areas on Ringgit that may ache our export. This is because if exchange rate excessively high, it becomes more expensive for aliens to purchase our goods ( Zaur Hasanov, 2009 ) .

Interest rate in America for the twelvemonth 2007 and 2008

Beginnings: Federal Reserve Board ; Bloomberg ; JPMorgan Chase ; BIS computations.

2.4.2 Currency and Balance of Payment

Balance of payment ( BOP ) is accounting record of supports track both the payments and grosss from aliens. Current history included amount of the balance of trade ( net export ) , net factor income, and reassign payment. In theory, the exchange rate will hold an impact on the current history ( anon. , 2010 ) . An grasp of ringgit, in another manner mean it become cheaper for investors to buy import goods. It will take to the lessening in net exports. Meanwhile, the cut of the net export will take to current history shortage. In summarize depreciation in the exchange rate should better the current history and an grasp should decline the current history. If we apply the theory into the existent Malaysia economic, the information shows that the current history balance in 2009 is decrease from 129,513 to 112,139. Although it is a current history excess, but the Balance of payment is decline aggressively. The subprime once more prove that it is set uping the Malaysia economic system by cut down the balance of payment.

In decision, subprime fiscal crisis has cause our state bead indirectly into recession by the planetary economic effects. During the subprime crisis, US were diminishing their involvement rate to stabilise the possible recession. It has stimulated our state ‘s to worsen the involvement rate besides to extinguish the export affected. Therefore, it was do the current history shortage. Although the subprime crisis is happened in twelvemonth 2007, but Malaysia has been more accomplished in twelvemonth 2009.

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