Global Financial Integration and Global Financial Crisis - Coursework Example

S THЕ РRОСЕSS ОF 'FINАNСIАL GLОBАLISАTIОN’ BЕЕN SIGNIFIСАNTLY WЕАKЕNЕD BY THЕ RЕСЕNT GLОBАL FINАNСIАL СRISIS (Name of the student) (Course Tittle) (Name of the professor) (Date) Globalization of the financial sector can be defined as the process of integration of financial markets of all countries of the world into one (Artestis et al, 2010). Financial globalization exists when uniformity exists in terms and condition of different currencies across the world for sourcing of international loans. Lund, Susan et al (2013) points out the existence of various currencies in different countries as the major source or barrier to financial integration and in turn proportionately benefits the developed countries at the expense of developing countries. One of the most recent financial crisis occurred in the year 2007 -2008, in 2007 it was called global financial crisis while in 2008 it was simply called financial crisis (Artestis et al, 2010). The great depression occurred in 1930 while in 1990 there was Asian crisis. Krugman (2008) noted that for almost three decades, financial globalization appeared to be unstoppable phenomenon and trend due to economic integration of the world, development of new technology and accessible world markets appeared to propel financial integration through international capital flow and investments. Artestis et al, (2010) in their study noted that global financial crisis has brought unstoppable trend of global financial integration era into a halt. Since the global financial crisis of 2007-2008 both the government and corporate bonds, market capitalization value equity value and other financial assets have grown by only 1.9% annually from a whooping annual growth of 7.9% of 1990-2000 (Lund et al, 2013). Several factors are behind financial crisis as noted by U. S senate report of 2010 as noted by Lund et al (2013). They mentioned factors like high risk existing in the financial markets, complexity in financial products, conflict of interest which are undisclosed by the market participants, failure of both the financial regulatory commission and credit rating agencies and lastly the failure of market itself in the rein in the excess of wall street. The findings of the U.S senate were a contradiction of the financial crisis commission of inquiry who found that global financial crisis was caused by widespread failures of the financial regulatory commission and the supervisory commission. The commission also mentioned the failure in corporate governance and laxity in risk management in strategic financial institutions. Lund, Susan et al (2013) states that a combination of both excessive inters bank borrowing, lack of transparency and risky investment among strategic companies and banks causes global financial crisis. Major financial institutions were ill prepared and inconsistent action by the government contributed to the global financial crisis and market uncertainty and panic in the market. The global financial crisis has weakened financial globalization and integration in many ways. Firstly, the financial melt down and financial systems in developed countries indirectly affect the economic development and growth in across countries (Ocampo, 2009). Countries within Eurozone recorded high economic growth five years prior to financial melt of 2007 compared after the crisis. Ocampo (2009) states that world economy has been subjected to serious financial imbalances, the imbalances in the economy includes the steady increasing current account deficit of United States. The GDP increased by 5% from 2004. Cross-border capital flows has collapsed due to financial crisis, this has fall from $11.8 trillion in the year 2007 to an estimated $ 4.6 trillion in 2012. In the Western Europe, the cross border capital flow dropped by 70% causing the global financial integration to move in reverse direction. Most of the banks within Eurozone have reduced cross border lending and other donation to developing countries by $3.7 trillion after financial crisis of 2007. The central banks now have more than 50% capital flow within Eurozone hence affected financial globalization (Lund, et al 2013). Howard (2010) argues that the World Bank in the past two decades of the financial crisis did exercises an orthodox financial reform which failed to focus on the critical analysis of the problem with strategy itself but instead decided to concentrate on the series of extraneous explanations. The problems include; i. Incorrect order of financial liberalization which include incomplete liberalization consisting of too much state ownership of the central banks, ii. State cronyism, incomplete market liberalization, iii. Poor corporate governance, iv. Too much industrial policy and v. Inadequate prudential regulation These bureaucratic laws and policies resulted into the collapse of large financial institutions hence the beginning of bail out of banks by the national banks and stock downturns across the globe. The policies also had negative effect on the housing markets which resulted into evictions, prolonged unemployment and foreclosures hence the collapse of global financial integration. Financial market crisis played a crucial role in ensuring failures of key business units and decrease in consumer wealth by around 20%. The U.S stock market declines due to financial crisis. It peaked in October 2007 but by October 2008 it greatly declines. By end of March 2009, the Dow Jones average index reduced from 14,000 to 6600. Phil Dow Market strategist as quoted by Ocampo (2009) believes that a clear distinction exist between the current malaise and the great depression, he stated that a fall of more than 50% less than seventeen months is equivalent of the 54.7% fall during the great depression which was latter followed by 89% drop in the following sixteen months hence this is a major barrier to global financial integration. Failure by financial institution is another major factor which contributed towards global financial crisis and notable events on this can be found on the financial reports of United Kingdom. The blockage of the withdrawals from the three hedge funds is a clear illustration of these events as investors soon started panicking as savers attempted to liquidate asset deposits in some of the highly leveraged financial institutions. This in itself a barrier to global financial integration as International Monetary Fund estimated that large US and other European banks lost more than $1trillion on toxic assets and from bad loans between the period of 2007 January and September 2009 and the figures increase to $ 2.8 trillion dollars in the year 2010. The losses by U.S banks were forecasted to hit over $ 1trillion and the losses by European banks were forecasted to be $ 1.6 trillion. Out of the estimated figures, British and other Eurozone banks losses about 40% of the estimated while US banks lost closed to 60% of the total estimates by International Monetary Fund. During the global financial crisis, housing sector was most heated since the construction firms could no longer obtain credit facilities from the market. Close to 100 mortgage lenders went bankrupt during the global financing crisis of 2007 and 2008. This development led to sale of many companies in the fear of companies collapse. The collapse of financial institutions were at its worst in 2008-October. Many financial institutions failed and were acquired under duress or were subjected to government takeover for instance the Lehman Brothers, this was a huge set back for global financial integration. Credit markets and micro financial institutions also suffered a setback during September 2008 where by the crisis hit it’s most critical stage. The mutual fund deposit, money markets also suffered the same fate. Withdrawals from the money markets were about $144.5billion during a period of one week verses $7.1 billion in the prior week. This development interrupted the ability of corporations to replace their intended short term debts. Due to this, the Government of United State embarked on the insurance for money markets on the accounts analogous to the banks deposits insurance through temporary guarantee and also with the Federal Reserves programs in order to purchase the commercial papers this hindered the cross border borrowing by the Reserve banks hence hindered the growth of global financial integration. The lending institutions in US were frozen during the financial crisis and this made the traditional banking system not to have the capital to close the gap by June 2010. The transformation of financial sector can also be seen during the growth of shadow banking system, this lead into rise of financial globalization with investors in each and every country holding a huge stake in other countries and the change was meant to reduce the market risk since most of the US. (Krugman, 2008) However, despite the negative effects of financial crisis, The Financial Times (2 January 2009) recently argued that it is a necessary evil as the world economy works best when international financial markets function under appropriate regulation (Krugman, 2008). In conclusion, financial crisis has weakened financial globalization by affecting the real economies, collapse of cross – border capital flows, ineffective financial linearization, liquidation of financial institutions, reduction in U.S consumption which has negatively affected the global market, and reduction in stock market among others (Ocampo, 2009). Therefore, cooperation between developed and developing countries on international financial matters is required to develop new institutional arrangements to counteract the effects of financial globalization. This calls for IMF to put development first and to have new institutional arrangements giving developing countries a full role regarding all policy issues and related decisions commensurate with their numbers and their rising GDP (Krugman, 2008). Reference Artestis, Philip& Singh, Ajit (2010) Financial Globalization and Crisis, Institutional Transformation And Equity. Krugman, Paul (2008). "Dubya's Double Dip?". The New York Times Lund, Susan et al (2013). Financial globalization: Retreat or reset? Ocampo H. T (2009)business analys on governments perspectives report 2008 and Soon Thereafter ($ in billions) Roger C. Altman (2008)"The Great Crash, 2008 – Roger C. Altman" Foreign Affairs Read More