CRONOLOGY

It all began with the bankruptcy of Lehman Brothers, an investment banking giant that
provided funding for home ownership loans to subprime individuals in the United States. The
desire to increase company profits led several companies to take "a thousand steps" with
various levels of risk. One of them was the launch of Subprime Mortgages.

Residents of the United States were given the opportunity to obtain home ownership loans
even though they were below the standard ability to pay installments because most of them
were unemployed or did not have a steady income. The boldness of providing subprime
mortgages was because they could foreclose and resell homes if there were defaults in loan
repayments (Uzaifah, 2009).

However, this scheme turned out to be highly risky because many subprime mortgage
customers were unable to continue their loans, resulting in many foreclosed homes being sold
at depreciated market prices. As a result, banks in the United States, Europe, Asia (especially
Japan), Australia, and the world's top investment institutions holding subprime mortgage
securities were also affected. These institutions incurred losses amounting to billions of
dollars, while the banks and investment institutions were listed on the stock exchange. This
situation led to a global stock market collapse.

The economic shock in America, which began in mid-2007 as a result of the low-quality
housing credit crisis, or more commonly known as the subprime mortgage crisis, actually had
deeper implications for the financial sector. This situation worsened, spread, and prolonged as
it was not only felt by the American economy but also experienced in various other parts of
the world (Sugema, 2012).

Some of these included the collapse of stock prices in nearly all parts of the world and the
bankruptcy of many financial institutions both in developed and developing countries. The
repercussions of the financial crisis in America were eventually felt by Indonesia as well. The
high confidence of the Indonesian government that the crisis in America would not affect the
Indonesian economy due to its strong fundamentals turned out to be unfounded (Sugema,
2012).

The occurrence of the crisis contradicts the theory of financial development, which views that
advancements in financial access, depth, and efficiency can lead to economic growth. The
Global Financial Crisis proved that excessive accumulation of credit leads to instability and
crisis. Subsequently, the theory underwent expansion due to the Global Financial Crisis,
evolving from initially just considering that financial development can accelerate economic
growth to being supplemented with many indicators related to financial development and the
appropriate pace so that financial development has a positive impact on the economy
(Santoso, 2018).

The impact

The impact of the financial crisis in the United States extended to the real and non-financial
sectors worldwide, including developing countries. Indonesia, as one of the developing
countries, also experienced its effects on the economy, as evidenced by several indicators
(Herawati & Gustan, 2020):

a. Stock prices plummeted sharply on the IDX (Indonesia Stock Exchange).

b. The exchange rate of the rupiah weakened against the US dollar, reaching
psychological levels. (It is a point at which the exchange rate is perceived by the
public to be a sign of a severe economic crisis)
c. The banking sector faced liquidity difficulties, to the extent that the government
struggled to secure loans in the financial market. (Sugema, 2012)

The ongoing impact of the financial crisis resulted in an economic slowdown felt by the
public, including layoffs in corporate activities. This was taken as a company policy due to
the sluggish economic conditions. At least until 2009, the government stated that around
57,000 workers were laid off due to the effects of the 2008-2009 economic crisis.
Additionally, according to (Sihono, 2008), The continuously rising world oil prices, reaching
the figure of US $110, have shaken economic stability due to symptoms and inflationary
pressures to finance fuel and electricity subsidies for the community, which consumes 1.3
barrels per day, nearly depleting a quarter of the state budget (APBN).

Furthermore, what many countries, including Indonesia, experienced was the high prices of
world commodities (imports), which had an impact on domestic commodity prices (exports),
leading to a food crisis estimated to affect 36 countries. This situation depicted an increase in
unemployment and poverty rates faced by the community, along with expenditure burdens
that triggered inflation for the government as a crucial problem needing solutions to avoid
exacerbating macroeconomic conditions.
Indonesia's Economic Recovery Steps

As previously outlined, the ongoing global financial crisis is bound to have negative impacts
on every country, albeit to varying degrees, including Indonesia. The direct impact felt by
Indonesia is primarily the losses incurred by Indonesian financial institutions that invested
funds in Lehman Brothers investment banking. However, indirectly, the effects of the global
financial crisis will still influence the Indonesian economy, as follows (Uzaifah, 2009):

1. Influencing Indonesia's economic growth momentum in the form of liquidity drying

up, spikes in interest rates, plummeting commodity prices, and weakening growth of
funding sources.
2. Declining levels of consumer, investor, and market confidence in various financial
institutions.
3. Flight to equity, Indonesia's capital market correcting due to indications of the
weakening of the rupiah.
4. Lack of liquidity supply in the financial sector due to the bankruptcy of various global
financial institutions.
5. Decreasing demand and prices of Indonesia's main export commodities without a
significant reduction in the pace of imports will lead to a widening trade deficit in the
future.
6. Difficulty in attracting large-scale capital inflows.

The government is disseminating its policy, which is an action derived from the president's
directives to the members of the United Indonesia Cabinet and the leaders of state-owned
enterprises, aimed at maintaining the stability of Indonesia's economic growth. The directives
are as follows:

1. All sectors must remain optimistic and synergize to preserve the momentum of
economic growth and manage and overcome the impacts of the financial crisis in the
United States. Therefore, we must not panic and must maintain public trust.
2. With appropriate policies and actions, as well as hard work and maximum effort, the
economic growth rate will be maintained at 6%. Components that need to be
maintained include: consumption, government spending, investment, exports, and
imports. Actions needed include utilizing the domestic economy and learning from the
 1997 crisis, where Indonesia's economic safety net was the MSME sector, agriculture,
and the informal sector.
3. Optimization of the 2009 state budget to boost growth and build a social safety net.
Things to consider are:
a. Provision of infrastructure and growth stimulation.
b. Budget allocation for poverty alleviation remains a priority.
c. Budget deficit must be appropriate and rational or not hinder the achievement
of targets (growth with equity).
4. The business world, especially the real sector, must continue to operate, so that state
revenues remain intact and unemployment does not increase.
5. All parties are urged to intelligently seize opportunities for trade and economic
cooperation with friendly countries.
6. Encourage the use of domestic products again to strengthen the domestic market.
7. Strengthen synergy and partnership between the government, banking sector, and
business world.
8. All sectors are asked to avoid egosectoral attitudes and trivializing issues. The
president emphasizes the importance of coordinated cooperation among relevant
agencies.
9. Prioritize the interests of the people above group and personal interests.
10. All parties are requested to communicate accurately and wisely with the public.

The ten directives from the president are implemented through government policy measures.
These policy steps include:

1. Legal certainty and investment guarantee.

2. Strengthening and safeguarding the resilience of the real sector.
3. Monetary stabilization through increasing the value of customer guarantees within a
single bank.

Next, the executive branch will take necessary contingency measures through the issuance of
Government Regulations in Lieu of Law (Perpu), including:

1. Government Regulation in Lieu of Law No. 2/2008 concerning the Second

Amendment to Law No. 3/2008 concerning Bank Indonesia.
2. Government Regulation in Lieu of Law No. 3/2008 concerning the Deposit Insurance
Agency.
 3. Government Regulation No. 4/2008 concerning JPSK.
4. Acceleration of the Formulation of the Financial Safety Net Bill.
5. Social Safety Net Program.

The directives, policy steps, and contingency measures taken by the executive branch above
are steps taken by the government as a defense for Indonesia's economy in facing the ongoing
global financial crisis.