Will There Be Another Financial Crisis in the Future - Coursework Example

Running Header: Will there be another financial crisis in the future? Student’s Name: Instructor’s Name: Course Name & Code: Date of Submission: Financial crisis Introduction As a result of the great depression that began in 1929 in USA, there was a collapse in the global financial markets which brought about significant economic downturn and severe social consequences related to a higher number of unemployed people. This study examines the important factors driving globalisation of the international financial market. It also examines the policy used and the structural and management issues that create an environment that is conducive to the evolving financial crisis. The underlying issues that result to the failure of several crises are also examined such as the failure of Baring Bank, the Asian Financial crisis and the global financial crisis. According to Held et al. (1999) globalisation can be described as a way of spreading communication, production and technological processes across the globe. These spread is facilitated by several economic and cultures activities. Globalisation can also be referred to as the effort used by international financial markets such as IMF and World Bank in promoting a free market where goods and services are exchanged. IMF was introduced in 1944 and it helps in encouraging international cooperation and dealings in money matters. It also enhances stability in various exchange rates thus creating a payment system that is employed internationally. The Baring Bank for example, which collapsed in 1995, was due to losses made by an employee. This was the oldest merchant Bank in London but the Bank reported losses due to market shifts. Factors that drive globalization Liberalisation of capital markets There are forces that encourage and drive globalization thus increased momentum of globalization since early 1980s. June (2008) argues that it is necessary since it encourages borderless business world as a result of the Global Agreement on Trade and Tariff (GATT) which encourages extensive liberalisation. The global trend can also be described using liberalisation, privatisation and globalisation (LPG). This represents the mutual interdependence among various forces in the global market. Liberalisation has also led to increased mergers and acquisitions across borders and also the introduction of other foreign direct investment. Liberalization has also led to increase in multinational enterprises that become successful once their link their resources to their objectives in the global market. Multinational companies also benefit from liberalization by linking their strengths to opportunities that come with globalization. Increased technology According to Stanley (2008), the other factor that drives globalization is technology. Globalisation trends have been facilitated by improved technology. This is because it increases the economies of scale thus enabling the market result to breakeven. Technology has evolved through various fields for example in the transport sector the development of air cargo has resulted to great momentum for globalization. This is due to reduced barriers such as distance. Effective methods of transport have also been introduced as a result of improved technology for example air cargo that transport of perishable and fragile goods. In the communication sector, technology has improved globalization for example since the introduction of worldwide web where many investor purchase goods through the internet. Improved technology has reduced the cost of developing new products, which has been huge in certain businesses for example in pharmaceuticals. Global market has reduced these huge costs in connection to the fast changes in technology that reduce obsolescence as well reducing pay back period. Globalisation also requires huge investment and diverse skills and this can be achieved through carrying out research and development which enhance new product development. Rising aspirations The other factor that has facilitated globalization is the rising aspirations and consumer wants. Due to the increasing media exposure and education, there has been a reported rise in aspirations of commodities consumed in other countries. Various people aspire to have things that would make them be satisfied for example wearing designer clothes. Such consumers opt to purchase from foreign markets once the domestic market is not able to meet their needs according to what they desire. Public policies This is the other significant factor that has influenced the pace of economic integration. Public policy fosters innovation and investments therefore resulting to development of better methods of transport. Chossudovsky (1997) describes that globalisation has improved economic integration for example through human migration where people have been moving to various regions promoting local goods and services. The other factor is through movement of integration in the financial markets. Government should ensure that all financial institutions have enough reserves to balance their short term and long term liabilities. Globalisation has increased economic interconnection for example developing countries have become more dependent and there has been a shift of power from the state policies to the Multinational companies for example coca cola, Sony and others. Globalisation also represents how ideas, cultural practices and technologies diffuse among many countries in the world. The global economy has dramatically shifted due to the rapid development of trade as financial linkages. Various firms have opted to market their product globally so as to enjoy the economies of scale. There is also a reduction in costs of products as a result of globalization. The emerging market economies have also facilitated more firms to market their good s and services globally. These factors have led to convergence of fluctuations of business cycles therefore creating openness to trade. They make an economy become sensitive to financial flows and other external threats. Globalisation has also increased risk sharing among different countries. The recent political shifts have however resulted to mismatch between the global financial market and state policies. This gap is therefore left for managers to formulate strategies for managing the structural and managerial issues. Some of the issues faced by firms that market their products globally include; cultural issues. For multinational firms for example the Mc Donald’s to succeed in the global market the cultural dominance is necessary. International finance involves various risks since assets traded in the financial markets are claims to flow of return that is used for many years. One example of dangers caused by the volatile financial market is the mismanagement of mortgage lending experienced in 2008 in US. This also led to banking failures and shortages in credit. Such sudden flows of capita lead to financial crises in most developing countries (Smith 2007). Financial crises have a great impact on the economy and for this reason governments have imposes strict policies over which banks operate. The policies control activities and conducts of various financial institutions to achieve efficiency gains. The other reason for imposing great restrictions is to create a flexible international financial system. Chossudovsky (1997) describes that a complex interactive system is usually difficult to analyse and it may result to financial crises for example the Asian financial crisis of 1997, which collapsed the long-term capital management hedge fund. The consequence of this is decrease of asset prices, increase in risk premium and reduced liquidity. Asian financial crisis According to Smith (2007) the Asian financial crisis initially started in Thailand where the country has accumulated a huge foreign debt which made the county bankrupt. This resulted to making their currency lose value against the US dollar. The result of this made the crisis spread to various countries for example due to organizations that were operating globally. The crisis spread to Japan and Southeast Asia where the spread led to devalued stock markets and increased prices of goods as well as increase in debt. Economists believe that the Asian crisis was due to ineffective policies that caused a mismatch between borrowers and lender which then resulted to leveraged economic climate. The role of the IMF in reducing financial crisis is to provide incentives to ensure structural adjustment of the affected economy for example by reducing government spending to reduce government borrowing. Global financial crisis Financial crisis is applied where various financial institutions lose huge money due to value loss of their assets. Some of the major causes of global financial crises were recessions, crashes at stock market and other banking panics. Banking panics may be caused by for example a bank run where depositors decide to withdraw a large amount or money at a given period. This leaves the bank bankrupt which then leads to credit crunch. The global financial crisis is also caused by unfixed exchange rate where the country currency is devalued as a result of speculation. This crises has various effects for example consumers reduce on their daily spending, there is also increase in withdrawals. The main contributor of financial crises is leverage. When a firm borrow to finance investments most likely it may lose money if the money will not be used to invest more profits. The other contributor of financial crises is mismatch in assets and liability. This mostly occurs in banks where they fail to have an effective link between the short-term liabilities that include individual deposits and the long-term liabilities such as giving loans. Smith (2007) shows that this mismatch is likely to lead to bank run thus resulting to bankruptcy for example Bear Steans Company collapsed in 2008 since it failed to finance its long-term investments. In attempt to mitigate financial crises, various governments have introduced regulatory policies. The main goal for this is to enhance transparency and accountability. These governments have introduced systems that show regular reporting of the accounting processes and ensuring that the financial institutions have sufficient assets needed to meet their goals. June (2008) describes that IMF has ensured that strict regulatory policies are imposed in order to avoid another financial crisis. Nick Leeson showed that the collapse of Barings Bank was caused by increased speculation where every loss he made there was more betting in order to get back what he has already lost resulting to more risk. Conclusion Globalisation increase has posed several benefits for example recessions have been shared among different countries since market failure in one country leads to a reduction in activities in another country. However there are some setbacks where it is argued that benefits of globalizations are not equally spread among countries and this therefore leads to income inequalities. The result of this is that the parent countries lose social capital and the receiving countries lose on social strain caused by immigration. In the near future it seems that financial crisis may be reduced since globalisation is increasing. Financial crises may happen again since they are said to be regular occurrence that results due to changes in the economy. However to mitigate the crises, governments should introduce effective fiscal policies which ensure that financial institutions have enough reserves to control borrowing. The IMF should also initiate other methods of stabilizing international currencies in order to reduce loss of value against the US dollar. This will reduce inflation and therefore mitigate the spread of financial crisis. References Chossudovsky, M 1997, The globalization of poverty, Impacts of the IMF and World Bank reforms, London, Zed Books, London. Held, D McGrew, A Goldblatt, D & Perraton, J 1999, Global transformations, politics, economics and culture, Polity Press, Cambridge. June, F 2008, International economics, The New Palgrave Dictionary of Economics, 2nd ed, Macmillan, New York. Smith, C 2007, International trade and globalisation, 3rd ed., Anforme, Stocksfield.  Stanley, W 2008, International monetary institutions, The New Palgrave Dictionary of Economics. 2nd ed. MIT Press, Michigan. Read More