The paper “ The Globalization of Financial Markets - Pros and Cons" is a spectacular example of a term paper on macro & microeconomics. To understand the financial crisis that have become such a common occurrence in the past decades, it best to understand what caused these crises which started in Thailand, engulfed Malaysia, Indonesia, and South Korea, and then continued to influence Russia, Brazil, and Argentina, and some would say now seems to been influencing financial actions in Europe? The Asian crisis was the outcome of a typical asset bubble--over-leverage and a boom-bust approach by investors.
For instance, in 1996 the whole bank debt in East Asia was around $2.8 trillion, or 130% of gross domestic product; nearly double that from a decade before. By 1996, power for the median firm had arrived at 620% in South Korea, 340% in Thailand, and averaged 150% to 200% crossways other East Asian countries (Mcinish, 2000, 92-112, 326). This chaos was financed with wealth inflows from new countries, which rapidly flowed away at the start of 1997.In order to avoid a financial crisis, it is first critical to understand the ones that have occurred in the past.
Forces should be in a place that would diminish the likelihood of such crises and diminish their crash when they do take place (Valdez, 2000, 62). Well-built financial systems perform as stabilizers when the domestic economy is worn out. But weak systems turn out to be magnifiers, making a terrible situation worse. AIM OF THE PAPERIn this paper, I shall provide a critical overview and reflection on the financial crisis. It is a known fact that financial crises have become more frequent in the last three decades as they were before the 1970s.
In order to examine the reasons behind it, I will first look into the definition of the financial crisis and its categories along with its causes and preventive measures. After that, I will look into the details of the phenomenon of financial liberalization that, according to most analysts, is the root cause of the frequent financial crisis. I will look into why it causes the crisis. FINANCIAL CRISISA financial crisis occurs when the demand for money increases sharply as compared to the money supply.
The financial crisis can take many forms which includeBanking crisisCurrency crisisCredit crunchExternal debt crisis (Markus, 2005, 77-81, 110-5)A financial crisis occurs when investors lose their confidence in the assets of that country and decide to stop or withdraw their money from that country. The best approach is to first examine briefly some forms of the financial crisis and their causes. CURRENCY CRISIS: Currency crisis occurs when the value of the currency is very unstable and people find it to be less reliable to serve as a medium of exchange.
This type of crisis usually hits severely small open economies; large economies tend to handle this instability through their foreign reserves by decreasing the excessive demand for a currency in the market. (Ansoff, 1965, 62)THEORIES THAT EXPLAIN CAUSES OF SUCH CRISISThere are many models that explain the currency crisis phenomenon; we will look at some of them briefly: CANONICAL MODEL: The model starts with the premise that investors will hold an exhaustible resource if and only if they hope that its price would rise quickly enough to offer them a rate of return more than or equal to that on other assets.
This is the fundamental logic for the famous Hotelling model of exhaustible resource pricing: the price of such a resource should rise overtime at the rate of interest, with the level of the price path determined by the requirement that the resource just be exhausted by the time the price has risen to the "stop point" at which there is no more demand. (Mcinish, 2000, 92-112, 26-8)