PARLIAMENTARY BRIEFING PAPER THE WORLD FINANCIAL CRISIS AND ITS IMPLICATIONS FOR GHANA Dr. Fritz Augustine Gockel 1 Introduction 2 Nature of the Global Economy What started as a financial crisis in July 2007 in the U.S. degenerated into a full blown global economic crisis in subsequent months. A financial crisis, also known as a credit crunch, occurs when there is an uncontrollable reduction in money supply and wealth with people losing confidence and refusing to honour their debt obligations. This creates disincentives for further credit creation, and incites lenders to recall existing loans. It was this phenomenon that was unleashed with loss of confidence by investors in the value of securitised mortgages including default on highly rated financial instruments in the United States and the first run on a U.K. bank in 150 years. Reverberations quickly spread beyond financial centres in the U.S. and the U.K. to other industrial countries in the world. What started in the U.S. as a mortgage crisis has degenerated into a global financial and economic crisis that compelled the United States Federal Reserve, Bank of England and the European Central Bank to inject unprecedented amounts of capital into the financial markets. The question that begs itself for an answer is why this crisis could occur in the 21st century? To fully appreciate the wider global implications of the crisis, and its impact on the economy of Ghana in particular, it is pertinent to outline the nature of the world economy, especially the increasing interdependence among countries on one hand, and the dependence of LDCs on the industrialised countries in North America and Europe as well as the emerging economies as major markets for their primary commodities and suppliers of their final and intermediate products. Referred to as Globalisation, this increasing interdependence is the process by which the people of the world are unified into a single society and function together as such, in a global village. This global village epithet connotes integration of world economic, technological, socio-cultural and political forces across countries, which are reflected in assimilation of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. As a global village, globalisation entails a huge variety of intertwined micro-processes that denationalise what had been constructed as national. For 1