Global Financial Crisis and Consequent Reforms - Literature review Example

Running head: GLOBAL FINANCIAL CRISIS Global financial crisis and consequent reforms Name Institution Instructor’s name Subject Global financial crisis Economic development is the desirable positive change from a lower caste in terms of economic growth to higher levels. Today the world economy is a collection of nations with diversity in their rates and degrees of development however cooperation between these countries enhances good relations among such nations and economic interaction. In order to understand global financial crisis better it is important to trace this phenomenon from late 1920s. This did mark the first crisis with the end of the First World War that. Many nations participating in the war have little to desire because of the immense suffering as a result of this war. It is almost a century since this event however the current situation did not witness similar condition even though the crisis is evident. The causes and the reforms following the current global financial crisis result from analyzing different nations and their subsequent reaction to the crisis. In addition it is evident that many nations are victim to declining global economies whose effects leaves a mark. All sovereign states ranging the most developed to the least have their share of the crisis however the difference arise in the strategies that the we put in place to counter such effects. For instance developed nations will take a very short time to fully recover on the other hand poor economies may have to wait for economic aid for effective recovery. Therefore the main objective in this essay is to try and analyze the world economic status by looking at different nations and assessing the causes of economic crisis and evaluating major reforms that these governments are embarking on in order realise their development objectives. In addition we will assess the role of international financial institution in contributing to this crisis as well as the major changes that we expect to see in these institutions so that they can restore the hope among many. Cause of global financial crisis According to (Fuchita 2010), an analysis of several issues amount to the causes of the global economic crisis. In his argument he points to the mistakes and negligence by financial institutions and other stakeholders resulting undesirable economic situations. He reveals that the occurrence of this crisis is timely and that many nations after undergoing through the process of enjoying continuous socio-economic stability the drivers of many economies forgot to monitor important details such as risks accompanying investment and the impacts of not re-evaluating abnormality in financial returns resulting to the crisis. Further analysis into this reveals that even though celebrating huge profits is always welcome it would be better to post pone the same is there risks coming along. The collapsing sector in the United States where monetary firms could not speculate on the fast approaching crisis is the contributing factor to U.S. failure to address the issue on time. The sector saw an increasing interest in the housing industry leading more borrowing for the purpose of buying homes. While seeking to address their financial shortages these institutions could borrow from related firms. In addition they could turn to the public for finances thus becoming more vulnerable and increasing their chances of collapsing. On the other hand the sudden change in prices for buying homes a misleading impression did result. This is the main cause of the collapse in the industry that today struggles back to its feet. In addition (Fuchita 2010) argues that the application of inadequate risk management strategies is a prerequisite to financial crisis. Financial management strategies are measures that monetary institutions consider in facilitating their day-to-day activities. In addition these managerial skills assist such bodies in anticipating future failure on time and plan on evasive action. Therefore any failure in the management will punish the entire economy as is evident in the 2007-2008 economic crises. Furthermore a number of financial institutions particularly in the United States saw it coming for instance the housing industry that saw many turn into financial institutions to access credit with the aim of purchasing homes. However with instability in the market prices due to a sudden change in demand for this commodity the situation saw many institutions collapse calling for rescue. Furthermore there are the changing aspects of financial products that manifest change in complexity. On the other hand these products and the financial institutions themselves lack transparency it then turns out that the kind of information in the market does not reflect the actual situation on the ground. Therefore we can not plan for the future because we do not have the accurate picture of what the situation is within our financial institutions. The conditions above culminate into global financial insecurity and the adoption of misleading measures in dealing with a potential crisis. Thus, we are destined to lose in this battle unless relevant and reliable information comes along commitment from monetary firms. According to (Stockholm International Peace Research Institute 2010) another cause of the recent global financial crisis stem from the practice where countries are over indulging in military expenditure and related expenses. Nations prioritize on equipping their defence systems with modern military equipments that consume huge sums of money. In addition the military industry has numerous inventions leading to new developments each day. Thus states have to keep on updating their stock digging deeper into the budget. However this is at the expense of economic development that all nations should prioritize in order to secure desirable achievement in terms of development. Additionally (Gup 2010) cites the increasing export prices and unemployment are another major catalyst to the global economic crisis. The author argues that with the ever increasing export prices many economies become helpless and they the returns from exports do not match their imports. Therefore such nations fail to meet their economic obligations that eventually result into a financial dilemma. In addition many governments turn into financial borrowing in the international levels they eventually become victims of dependency. Continued dependency on other nations increases debts and these nations cannot withstand a crisis facing their donor they all have to accept these fate. Energy crisis is another cause of financial crisis in the world. It is evident that nuclear power production seeks to solve the energy crisis however more and more firms are coming up leading to higher consumption rates overwhelming energy sources. When this happens it affects the production of commodities in the industries hence scarcity. As a result prices change in a positive manner this in turn does cause imbalance in the money market because it shifts the markets attention and thus attracting unnecessary short term investment opportunities that bring down the sector when sustaining them becomes a serious problem. Reforms following the global financial crisis In order to address the effects of the global financial crisis the major economic powers did implement measures that would facilitate economic recovery as well as preventing future problems of the same nature this is possible through the implementation reforms. Among the major reforms following the major global financial crisis that could date back to 2007 include assessing once again the on global accounting systems and establishing desirable standards. Thus according to (Nanto 2010) securities require these measures urgently during certain times to prevent graving instances in the event of predictable financial crises. The global financial system should purpose to establish high standards that will serve as foundation into a better future that is free from such financial challenges. Another reform includes enhancing transparency and accountability in the money landing sector as well as purposing to bring such risks into manageable levels. This will help in facilitating crisis anticipation and ways to evade the same (Nanto 2010). In all financial institutions transparency is a requirement that we should not neglect. It helps in facilitating openness in these institutions thus enhancing the transmission of reliable information to relevant authorities as well as the public. With such information we can predict the future with ease and plan ahead. On the other hand accountability is an equally important treasure in financial intuitions it enhances the responsibility from individuals thus helping in promoting interaction among nations. In order to enhance good performance the author argues that there is need to improve the rewards systems in this sector that target those who have the courage to engage in risking taking hence lowering the loss. This reform seeks to reduce the risks that accompany investment at the same time promote development. Similarly it seeks to establish the best reward system that will accommodate more investor without impacting negatively on the investor or the financial institutions thus bringing desirable results on time. Further more reassessing the role of global financial institutions by evaluating the performance of these systems and addressing their needs in terms of resources could help in quick recovery. However (Nanto 2010) argues that these reforms could only succeed in the event of ensuring that there are major changes in the market setup that promotes economic freedom. In addition the author points that property that individuals own demand great respect if at all success has to come. He argues that the world should be ready to embrace healthy competition in trade and participate in the establishment of laws that govern our financial institutions. Success in any undertaking comes forth after enduring hardships and stiff competition. Therefore healthy competition is a prerequisite to invention and improvement. The author is quick to point that free trade and open investment could facilitate the achievement of desirable financial reforms. Therefore different state should embrace these reforms by facilitating trade alongside these changes. Additionally alleviating trade barriers as one of the reforms will play a major role during the implementation. Therefore changing on protectionist arrangements will play a significant role in reducing future financial challenges (Nanto 2010). Nations adopt protectionism when trying to protect local industries from the giant economies that could ruin their operations however the current crisis should focus on relaxing these rules and integrating a favourable trading environment where the stakeholders enjoy free trade. By reducing trade barriers countries will encourage more interaction as well as attracting more investors into their trade block. In addition facilitating recovery calls for the participation from all stakeholders particularly partners in trade such as states in an agreement that purposes to eliminate any limitations in the investment sector. This will open up more avenues and assures investors more security while they embark on and plan to expand their niche. Over the decades political instability frustrate investors who opt to pulls out from areas prone to such challenges because these are the same areas that operate under extreme trade laws encouraging trade barriers. Further more (Fuchita 2010) the following are reforms as important and that they require implementation in order to stimulate economic recovery and prevent repetition in future these includes enhancing the performance of financial institutions. He argues that Promoting cooperation among different states with the aim of helping financial institutions to rescue them in case of such incidences. International cooperation has an important role to play in facilitating recovery in global financial crisis. We cannot survive all by our selves however together it is possible to fight against impending financial dangers through better decisions over the same. Other reforms following global financial crisis include purposing to increase regulatory capital in order to facilitate trade and economic recovery that will help many nations escape this menace. Similarly increasing capital requirement for trading books is another strategy that could help a lot during this recovery procedure. This reform could see through many economies as they fight to regain their lost glory. In addition the adoption of simple leverage ratio as part of these major reforms will eventually facilitate successful economic recovery in due time. Finally there is the need to formulate relevant rules for the structured markets. Without these rule progress and trade interactions may not take due process because nations will revert to their normal business that will adversely impact of financial recovery. Similarly trading partners should purpose to set desirable rules to govern over-the-counter derivatives. Furthermore controlling short selling will also help in this process. Principles to guide financial reforms In order to succeed with the implementation of the financial reforms (Nanto 2010) argues that countries should reason together because when one state suffers an economic crisis this has an effect on other state directly or indirectly. The author shows that the world is a global village and that negligence by one stakeholder could adversely impact on the whole world. Therefore there is need to enhance transparency in this process as well accountability on all financial undertakings. This will mean giving correct information on matters concerning finances in order to avoid misleading other players into making wrong decisions. In addition this helps in reducing risks thus safeguarding the delicate future. Secondly the author reveals that it is important to facilitate regulations of the financial market through an oversight credit rating strategy this will enhance risk management. In addition the strategy will very useful in facilitating market reforms (Nanto 2010).   Thirdly we should be ready to maintain stable markets free from manipulations and possible threats that could result to illegal adventures such as terrorism. According to (Nanto 2010) market stability is critical for economic development as well as quick recovery in situations where the crisis is severe. In addition the world can bare witness that terrorism strains international cooperation, free trade opportunities, and that it leads to high levels of insecurity that in turn threatens investors. For successful recovery many stakeholders have to pull resources together and push their way forward however cannot take place with insecurity. Fourthly inter-state interaction through the formulation of principles that guide and encourage cooperation is very important. This would enhance mutual cooperation and understanding between different nations thus promoting financial cooperation. In addition the formulation of laws would regulate the market in order to facilitate joint development. And fifth there is need to facilitate reforms in the money sector through good leadership that will help all states to predict possible challenges. Accuracy in supplying information will allow accurate speculations and the anticipation of what might happen in future. This will facilitate quick action to divert or even evasion of serious challenges that could negatively affect our economies. The financial various countries across the globe According to (Nanto 2010) many countries still feel the effects the global economic crisis and their experiences over this issue is a matter of concern. For instance states like South Korea are victims of the economic slump that saw many investors withdraw from the country citing huge debts owing to the international monetary fund. However the country has some reforms including helping financial institutions to their feet through economic stimulus packages. This reform calls for commitment from the government and other stakeholders. Similarly (Nanto 2010) argues that Pakistan faces economic challenges that are a result of the global economic crisis which impacts negatively on her economic growth. There is high unemployment, and inadequate food supplies throughout the country. The same case applies to many other countries across the globe. However the situation in the country continues to escalate due to political instability. In order to reduce the effect of the financial crisis the country has the following reforms that purpose to change her economic polices that will see subsidies relating to fuel, energy, and food decline. In addition the county is trying to manage its debts by controlling external borrowings (Nanto 2010). In addition Pakistan is deliberating on reforms that will see major changes in the country’s tax systems. According to (Hunter 1999) the global financial crises in Asia are as a result of external forces as the catalyst towards her downfall. The author argues that there are many factor that make up for the causes of financial crisis the continent however the main cause is the huge flow of economic aid into this region. The author argues that before donors make any contribution they must have a huge surplus which they pump into upcoming economies. This is what builds up to the Asian crisis because of their unsustainable nature. Other causes in Asia include inefficiency within the investment sector that result in low returns. In Australia the situation is the same because financial institutions are in a dilemma just like in the United States the housing industry has a great effect on the banking industry because of the abnormality in price change leading to bad debts. The effects of the staggering industries have negative effects in her economy even though she is in the process of recovering. However the country's government has a rescue package for these institutions which include guaranteeing deposits insurance on deposits. This initiative from the government seeks to assist financial institutions on to their feet as well as other related sectors. In conclusion it is evident that global financial crisis is a reality and that its effects are all over the world. Different states are witnesses if not victims to these effects and many of these are in the recovery process. The crisis did not spare even the giant economies therefore it calls for concerted efforts in the fight against future crisis. The crisis saw nations adopt reforms in order to be in line with the rest world. The are different causes to the crisis including the collapse of the housing sector financial institutions in the united states, Australia, and many other nations. In addition negligence did play a big role in this because this crisis did result from failure by some stakeholders in disclosing useful information. Similarly the energy crisis, speculative economy, food problems form part of the main causes. To counter the spread of this crisis reforms in the financial sector are a necessity. These reforms range from international cooperation, changes in the regulation of money lending institutions, introduction of certain derivatives to enhance trade, hedge funds, credit rating and the formulation of rules and regulations governing trade. These will see the lifting of trade barriers and facilitation in the opening up of investment opportunities. References Fuchita, Y. Herring, RJ. Litan, how the society vies young people with AOD ISSues RE. After the Crash: The Future of Finance. Brookings Institution Press, 2010. FUND, IM. Global Financial Stability Report, October 2010. BERNAN ASSOC, 2010. Gup, BE. The Financial and Economic Crises: An International Perspective. Edward Elgar Pub, 2010. Hunter, WC. Kaufman, GG.Krueger, TH. The Asian financial crisis: origins, implications, and solutions. Kluwer Academic, 1999. International Monetary Fund. The Asian financial crisis: origins, implications, and solutions. Kluwer Academic, 1999. Nanto, DK. Global Financial Crisis: Analysis and Policy Implications. DIANE Publishing Company, 2010. Stockholm International Peace Research Institute. SIPRI Yearbook 2010: Armaments, Disarmament and International Security. Oxford University Press, 2010. Read More