How Previous Instances of Financial Crises can be used to Forecast Developing Financial Crisis - Assignment Example

?Proposal to Review How Previous Instances of Global Financial Crises can be used to Forecast Developing Financial Crisis August Introduction The globalisation of the international economy has produced unique challenges. The collapse of fiscal policies in one part of the world affects the entire globe. Recent decades have seen fiscal challenges that could have been avoided if careful monitoring had produced positive action on the part of involved governments and regulatory agencies. The proposed review is aimed at discerning how fiscal policies cause financial crises to precipitate. These can be used to analyse how such crises could be avoided. This proposal includes detailed descriptions of my methodology for collecting data, schedule for the review as well as my relevant qualifications that make me well suited to this job. Justification of Review The twentieth century witnessed its first financial crisis early within the first quarter. Consequently, the world drifted into another greater war in an effort to gather enough fiscal resources to claim complete financial independence. (Friedman and Scwartz) The financial imbroglio is considered to have emerged as a result of loose ended banking policies. Multiple symptoms were experienced before the financial crisis in the shape of minor fiscal hiccups such as the New York Stock Exchange Crash of 1901, the banking panic of 1907, the panic of 1910-11 and the Shanghai rubber stock market crisis. (Bernanke) The final manifestation came through in the form of the Wall Street Crash of 1929 which crossed the Atlantic and caused militant ideologies to spring up throughout Europe. Consequently, the Second World War broke out which plunged the entire world into untold misery and conflict. This major upheaval was followed closely by the oil crisis of 1973 that was brought about by OPEC in response to the stock market crash of 1973-74. This crisis was followed closely by a scramble for the Middle East which has had far reaching consequences as authoritarian rules sprung up and fuelled militancy. It would not be an exaggeration to relate that the attacks on American soil on September 11, 2001 had roots in the oil crisis and its consequences. Moreover, the oil crisis of 1973 redefined the ways in which consumption patterns were organised. The escalation of oil prices encouraged the use of more efficient vehicles and promoted a drive towards more sustainable forms of energy such as LPG (liquefied petroleum gas). (Eichengreen) Other than the financial crisis listed above, South America saw the development of a debt crisis that soon engulfed the region. The problem began with the “Mexican Weekend” bank default in 1982 that served as a catalyst for the entire region’s banking systems to crash. The resulting imbroglio witnessed the Latin American debt crisis that forced these already marginalised nations to cut further spending on social development programs. Consequently, the eighties and nineties played host to the development of large drug cartels and mafias that employed the scores on unemployed youth. The resulting struggle in South America left scores dead and saw drug trafficking to the First World increase by leaps and bounds. Names such as Pablo Escobar became legends by becoming philanthropists out of drug money while millions of youth spoiled their lives around the globe using the same drugs. The onset of the nineties saw the development of financial crisis in both the United States and Japan. The high point of financial crises culminated when Japan was hit by the 1997 stock market crash. Large names such as Casio and Yamaha defaulted and Japans’ position as the prime producer of precision goods declined. However, the financial crisis did not limit itself to Japan but spread to other parts of Asia and caused a storm of devaluations to take place. This was followed closely by the Russian financial crisis of 1998 that saw the government weakened to an extent that it could not pay off pays for its employees. Large banks collapsed and mafias evolved over time to fill up the void. (Kindleberger and Aliber) The turn of the millennia saw the development of the dot-com bubble whereby speculative trading over internet companies caused widespread crashes in the financial markets. The resulting uncertainty encouraged fast investment in other sectors. Speculative trading was replaced by conman trading. The uncovering of the Enron scandal shook the very foundations of the financial markets that were grounded in certain principles before. Financial auditing and CSR (Corporate Social Responsibility) became highly criticised. Enron served as a major lesson to financial markets around the world. However, the next financial crisis was just around the corner and though it was similar in nature to financial crises before it, it could still not be dissuaded. Uncontrolled borrowing from banks and unpaid debts soon gathered a momentum of their own and caused the financial markets to hit a low point comparable only to the Great Depression of the 1920’s and 1930’s. (Reinhart and Rogoff) Objectives of Review I am proposing to review available literature on financial crises so that the causations behind such crises can be better understood. The various reasons behind these crises can then be easily utilised to monitor situations that may delve into financial imbroglios. My review will be focused on the aims listed below: Common signs and symptoms of brewing financial storms (banking warnings, stock exchange hiccups, interest rates etc.); Establish a clear relationship between symptoms and the onset of a financial crisis; Clarify how these symptoms could be used to diffuse a potentially damaging financial crisis. Financial markets are based and analysed on a number of fiscal symptoms but perhaps an understanding of money’s supply and demand in the shorter and longer run is the best way to approach the problem. The resulting changes in interest rates, borrowing philosophy, business activity generation and the like are often clear enough to delineate the economic and financial health of a particular region. International markets are now well connected so any changes in one part of the globe are bound to affect other markets too. These symptoms can be easily utilised to forewarn what kinds of impacts they may have for markets around the globe. Myriad other signs are also used to predict financial failure in the longer and shorter run such as statistical analysis but trying to discern international fiscal markets without considering political phenomenon is little more than groping in the dark. (Friedman and Scwartz) My review will discuss what common symptoms exist in various financial markets and which symptoms are superior to others and why. These symptoms will then be applied to various financial crises around the globe following which a clear cause and effect relationship would be developed between the symptoms and the resulting financial crisis. Way Forward This section will discuss my plan for achieving my objectives outlined above. The onset of the recent global financial crisis has prompted strong interest generation in understanding the very nature of financial crises around the globe. Consequently large directed efforts at research on this issue have produced highly effective works on the development of financial crises. Numerous books, journal articles, conference proceedings, website articles, blogs have been produced that attempt to explain how the recent financial crisis occurred and how previous financial crisis occurred. These sources are deemed enough to provide enough credible information to carry out research on financial crises. The primary audience for my review will be students with backgrounds in finance and marketing. Most of the concepts delineated in my review will be understood by them but some advanced concepts will have to be explained in sufficient detail. The secondary audience for my review will be non technical readers who would possess little idea of technical financial jargon. To make things simpler, I will try my level best to explain concepts as simply as I can. Moreover, I will try to present an unbiased investigation that can be utilised later to discover newer perspectives on the issue. Management Plan This section will explain my costs, schedule and my personal qualifications better. My research will culminate in the form of a formal report that will be presented by 7th October 2011. In order to achieve this objective, I have organised my schedule so that I can sift through various sources of information, compile my findings and give them discernable shape. The schedule is presented below for reference. Most of my sources will be taken from the local library and from the internet so no appreciable costs are involved. Small costs such as copying articles and the like will span little more than $50. Being a business student I have a background in finance. Moreover my personal interest in terms of financial crises will aid me in getting this review done. Various courses that I have taken to date will also aid me in establishing a clearer perspective on the issue of financial crises. Bibliography Bernanke, Ben S. Essays on the Great Depression. Princeton University Press, 2000. Eichengreen, Barry. Financial Crises: And What To Do About Them. Oxford University Press, 2002. Friedman, Milton and Anna Scwartz. A Monetary History of the United States, 1867-1960. Princeton University Press, 1971. Kindleberger, Charles P. and Robert Aliber. Manias, Panics, and Crashes: A History of Financial Crises. Palgrave Macmillan, 2005. Reinhart, Carmen and Kenneth Rogoff. This Time is Different: Eight Centuries of Financial Folly. Princeton University Press, 2009. Read More