The Impact of Globalization - Assignment Example

Name of the student Course Tittle Name of the professor Date The three major factors that lead to Global financial crisis include Housing Prices, monetary policy, and finally wrong perception of risk. 1. Housing Prices There was a steady rise in the housing prices ten years to 2006, before it dropped by around 30% from 2006 to 2008. The rapid rise in house prices was prompted by the high demand late 1990s. Then there was the decrease in interest rate early years of 2000. Because of this, prices shot up by constant number 3 for almost ten years since 1996 (Bernanke 2010). Large gains were realized during this period by many markets that were in the coast such as New York. Terrifyingly, the housing price’ national index in United States dropped by 31.6 percent from the middle of 2006 to early 2009. 2. Monetary Policy The steady rise in the commodity price between 2003 and 2006 created concern on the inflation that altered the monetary policy in US (Bernanke 2010). The sharp reversal in the monetary policy coupled with the failures of the financial regulations significantly led to the 2008-09 financial problems. There was a loose and unsupervised interest rate. 3. Wrong Perception of risk Finally, wrong perception of risk led to poor management. When the financial were good, people thought and behaved like it would remain the same all time. This happened during the rise in house price (Rodrik 2008). When the reversal trend came in mid 2006, risk aversion rose so high. The level of risk aversion rose more than the normal one before leading to global inancial crisis. Two major consequences Global Financial Crisis include the following: Rise in risk The most common one is the consequences that have emerged because of continual increase in risk in the economy. Continuous increase in the risk aversion is very risky as it might affect severely on the macroeconomic factors. Businesses thrive well when there is confidence. Confidence gives managers humble time to make rightful decisions that managers assume when under undue pressure from the possible uncertainties (Rodrik 2008). Customers and even firms are only free to spend when the environment risk free. This means that they would pull out when the environment is risky. The same also applies to financial institutions and banks. When environment does not feel confident the banks decides to withhold landings or do it cautiously. Risky environment causes the projects that were initially potential seem so risky and investors shy away from them (Rodrik 2008). The rise in risk because of the global financial crisis has led to the rise in the bad debts. The banks that hit by the crisis find it so hard when facing bad debts. To the banks and financial institutions, the current environment leads to down sloping profits of the firm. Since the right cause of the global financial crisis was not very clear, almost everything seemed so risky. Consumers did not know what was going to happen the following day and therefore they pulled out their spending habit with an intention of being secure. Generally, financial problems are first attributed to finances (Rodrik 2008). Banks and other money lending institution stopped lending money which led to a slow investment during the crisis period and the effect can still be felt even in the preset times. Savings by individuals and larger institutions slowed downed for fear that the banking sector would go bankrupt with their money. Sharp change in money supply in the financial market was the result even without the government interference. Main causes of global financial crisis because of market failure. Market participants have therefore remained too cautious resulting to more complex and inflexible rules in the financial markets. Enforced regulations that are meant to prevent and reduce the possible financial crisis are becoming unrealistic and therefore has made financial transactions very hectic. Political advantages have been taken to influence the financial market in a way that will be beneficial to a given state or another. The policy intended to control the problem of financial crisis, has become the greatest hindrance to the financial performance. Emergence of regulatory responses The second most important consequence of global financial crisis was the emergence of various proposals of the regulatory responses towards financial crisis. Many responses are in place for implementation (Nissanke and Thorbecke 2006). A few of the regulatory proposal include the regulatory plan by Obama to regulate financial transaction that was proposes in 2009, regulatory responses to control on the subprime crisis, there was also a debate on the crisis of the subprime mortgage solutions. Prominent advisers and president Obama introduced multiples of regulatory responses in 2009. Financial regulations on banking sectors are to bring transparency in the financial market. Since most blames on the cause of financial crisis was on the failure of regulations in the banking sector, an improvement and new regulations proposed to help solve the problem and prevent the possible repeat of the same (Nissanke and Thorbecke 2006). The proposed convergence of the international regulations was meant to help the deepening market. Most of the proposal were addressing consumer protection, capital requirement and many other areas. Financial crisis affected the world economy and any effort to prevent the repeat and to reduce the current effect is positively embraced. Global financial crisis had massive effect on banking sector in the whole world. The most common effect that was felt was the rush withdrawal of savings by the clients. Banks rely mostly on the money being saved by their clients to pay those that need withdrawals. Sudden and large demand for withdrawal become very impartibly. With the same situation becoming persistent, the bank may close down due to bankruptcy and that will mean that the customers will lose their deposits. This led to banking panic especially in US and Australia. Amongst the most developed economies in the all world, Australia successfully went through the Global Financial Crisis with least effect on its financial economy. Their banks also were least affected. Some of the significant effect of the crisis was how it affected the funding mix of the Australian banks (Asian Development Bank 2008). It leads to a reduction in the deposit with wholesale debt going up by 6 percent from 2007 to 2009. While the long-term debt increased, there was a significant decrease in the short-term debts from around 30% to 24% within 2007 and 2009. Other consequences of Global Financial Crisis in Australian banking sector was the increase in the concentration in the banking industry (Asian Development Bank 2008). The industry experienced several mergers while some foreign companies left the market because of scaling factor. It is in this period that Westpac Bank took over St George Bank. It is possible to conclude that the Australian banks was profit efficient as compared to cost efficient which implies that the sources of efficiency was more from the costing side compared to the side of revenue. Global Financial Crisis significantly weakened U.S. banking sector. Because of crisis, banking failures has been on the rise. US have been experiencing economic recession and general condition of the banking sector (Reinhart and Rogoff 2008). To help correct this situation, the lending standards and terms tightened. The step could possibly discourage economic recovery. Stronger regulations suggested ensuring smooth operations of the business. Regulations meant to help create conducive environment for banking industry in US and not to suppress themso many reforms have been witnessed in the banking industry that has seen banking system in US showia positive change (Reinhart and Rogoff 2008). Present value of the bond (PV) = Future value (FV) × (1+ coupon rate (rcp)/period of maturity (n) = (500×$1000) × (1 + 0.06)/5 = 500000 × 0.212 = $ 106 000 Yearly Interest on the bond after = (500×$1000) × 0.06 = $30000 Coupon payment =3000(1+0.06)-1+3000(1+0.06)-2+3000(1+0.006)-3+3000(1+0.06)-4 +3000(1+0.06)-5 = 10090.67 Total financing = $106000+10090.67 = $ 116090.67 ii) Increasing the credit rating from AA to AAA with the coupon remaining at 6 percent will have no effect on the amount of financing. This is because credit rating of AA to AAA is having the same coupon rating. 5) a. Financing is given by: 50000000 1+ 0.05(180/365) = $2027780594.14 b. commercial paper would be much preferable to the bills. Reason is, commercial papers save on the legal charges by the banks. The company will also save on the interests that are charge even without withdrawals. Low costs are associated with commercial paper unlike in the bills 6. Calculation of the cost of equity= 0.06+ 0.09/0.91 = 0.1589s = 15.89% NO. Going by the calculation shown above, buying the share will be very expensive. The cost of shares is greater than the expected return on shares by 6.89 percent. The difference is so big implying that the shares are likely to result into losses and not pay dividends. References Asian Development Bank (2008), Asian Economic Monitor 2008, December 2008, Manila Bernanke Ben (2010) “The Global Savings Glut and the U.S. Current Deficit”, Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia. International Finance (2009), “Capital Flows Market Economies,”27 January 2009, Institute of International Finance, Inc, Washington. Nissanke, M. and Thorbecke E. (2006). ‘The Impact of Globalization on the World’s Poor’. World Development, Special Issue, 34 (8).pp 236. Reinhart, C. & Rogoff, K. (2008). Is the 2007 US financial crisis so different? An international historical comparison. American Economic Review, 98 (2): 339–344. Rodrik, D. (2008). Why we need to Curb Global Flows of Capital. Financial Times, 26 February. Read More