Analysis of Global Financial Crises - Assignment Example

Running Header: Global Financial Crises First Names: Student Number: Institution: Course Number: Course Name: Assignment Due Date: Introduction A global financial crisis is not a new thing in the world of economy. The economical world crises have been brewing for sometime now. The first great economic depression was experienced in the United States of America in 1929 (Volkan 2008). Since then there have been numerous global financial crises which have taken place since. These financial crises have had serious effects on the world of economy and more especially on the banking industry. Many financial and non-financial institutions such as insurance companies have collapsed since they have failed to match the prevailing economic challenges. The governments even from the wealthiest nations have been challenged to come up with different packages to salvage their economies (Adalet 2004). On the other hand, the many citizens from various countries are so much concerned with those have the responsibility to formulate policies on financial matters that they think have failed to perform their duties. The majority of the world residents are actually worried of what will happen if the global financial crises persist. This is because the majorities are aware of the likely consequences that these crises are likely to bring upon their lives and they can influence their livelihood. The impact of the global melt-down is likely to affect every individual irrespective of the economic region one is operating. This is because the global economy is highly interconnected. However, some of the effects related to economic crises could be easily avoided if all the ideologues and concerns and stakeholders are taken into consideration while addressing issues related to financial issues (Volkan 2008). The intention f this essay is to address the issue of global financial addressing by focusing on the most recent financial crises in the United States, the role of financial institutions and bankers in the world economy, the areas of financial systems where the financial regulation is inadequate, the recommended changes to the financial regulatory system, internationally and domestically and the ways in which they will help remove the gap that exists between different financial systems in addressing financial issues. a. Provide an analytical description of one or more financial crises that have occurred in the world’s economy Currently the United States and many European countries are in very serious financial crises. In many a time several demonstrations have been witnessed in the united states near the financial centre close to the famous Wall Street, the reason for this being the demand to have the government several changes to the country’s financial systems and at the same time amend those that do not take into account the people’s needs but only benefit the banks. A financial crisis is not a new thing in the United States. The country first had a financial crisis in 1929, during the great depression when the country’s economy suffered a major setback. During the earlier 1980s, like many other world countries, the country also experienced a major crisis that affected many economies following great inflation (Bardhan 2008). Currently, the country is experiencing a major setback from the world economic downturn. The current financial crisis has seen many banks run bankruptcy including the biggest and most trusted banks. This is because of the market volatility that many of the banks are experiencing. The financial crisis that is currently facing America and many of the European countries is directly related to the financial crisis that is facing Greek. This follows the country’s submission to the International Monetary Fund (IMF) and social unrest. The resultant of the current state is what many merging countries such as India cannot run away from. Globalization has been attributed as the major contributor of the financial crisis that the world is facing currently (IMF 2012). This is because at every minute trillions of dollars is transferred unregulated. This also follows the high level of gabling on the future of the financial markets. Given the fact, the fact that America is one of the strongest economies in the world, its financial foundations have been laid on fragile ground where several banks have gone a step further to borrow large amounts of money that they cannot be able to repay. This can be likened to the case of the sub-prime where individuals who cannot afford to pay loans are given money to buy houses. According to Occupy Wall Street, the situation that America is facing currently is attributed to the massive resources that have been used by the country in war. Many of the citizens believe that the economy would not be as bad as its now if it were not for the wars both in Iraq and Afghanistan which the federal government engaged in. even though the Occupy Wall Street team has continued to blame the Wall Street on the current challenges the country is facing, the majority of the American citizens believe that the federal government is primary responsible for country’s problems. The country’s problem started in 2008 during the sub-prime crisis. To add to the country’s financial crisis is the current financial debt crisis that is facing the European countries. This not only spells financial doom for European countries but also the United States according to Dipak (2011). b. The role of financial institutions or bankers in the world economy Financial institutions have got a very major role to play in the financial systems. This is because they have the capacity to control the financial activities in their respective countries. Even it’s not always easy to correctly predict the financial trends globally, it has been established that the injections of some funds to the economy has played a big deal in ensuring stability in the global financial sector. It is always easy to get interested in knowing the role of the financial institutions in ensuring stability sustainability in the global finance (Amyx 2004). This is because they are major stakeholders in managing issues that are related to finance. However, based on the current global financial crises, it seems like many of the banks have downplayed their role in working towards stability in the financial sector. In many occasions many banks have failed to listen to the environmental concerns and thereby working on those strategies that only look attractive unto them. This is because they perceive economic environment issues as marginally issues that do not add value to their business. However, to make sure that stability in the financial sector both locally and internationally is achieved, the banks are expected to make substantial investments to the environment, technology, energy systems and infrastructure which are all very critical to economic sustainability. By doing this, the banks will be assisting in promoting economic prospects which will directly translate to resilience in economic growth and consequently ensuring stability in the financial sector. The banks are also expected to come up with new ways of ensuring that innovation in the financial sector is enhanced as one way of promoting new markets and at the same time reduce the cost of operations. According to Goodman et al (2008), the main challenge that most banks face while trying to sustain its stability, is the escalation of cost of operation. Given, the globalization of business and acceleration in advancement in technology, it implies that many of the upcoming financial institutions will not be able to compete favorably in the finance sector. In addition, financial institutions are known to respond very well and steadily when open and clear opportunities are presented unto them in a very consistent manner. However, there has always been an element of inconsistency and ineffectiveness in terms of policy that govern the exploitation of available opportunities thus sending a very negative signal to the market and thereby affecting the markets adversely. This has been a major concern world over on how different banks behave in carrying out their operations. So much speculation needs to be reduced in order to contain unnecessary anxiety in the financial sector. In such a situation, the banks or financial institutions have the authority to enact internal policies that will be used as a control factor in making sure that banks do not only focus on their own interests but also on the effects on their actions on the business environment (Nesvetailova 2007). c. Areas of the financial system in which financial regulation is inadequate, and why Several attempts have been made world over as part of the effort to ensure stability in the financial sector. According to the 2011 IMF report on global financial stability reveals the risks to financial have continued to multiply despite the efforts made to enact different policies that will see stability and as well as management of bank debts and other problems that are related to the banking. The European policymakers for instance, have embarked on developing policies that are considered very significant in addressing medium-term issues that contribute to financial crises and as a matter of fact, these banks have greatly helped in improving the market sentiments. However, these policies have not worked on issues related to independency of financing. This is because the policies only address issues that affect European banks as whole and not as individuals. In such a situation, the banks find themselves in challenges that are related to deleveraging something that might further ignite the situation in the euro area countries. I think such policies fail the test of the day where banks are expected to remain focused and resilient the economies issues that are found within the operating environment. This is to mean that unified policies lack the capacity to address homegrown challenges. This is where the financial policies have failed to prevent spillover to other markets. This is because the policy affecting each bank affects the whole region. The policies have also failed to adequately address the adverse feedback loops and thus is taking away some of the sovereigns as foreign and large investors expose their plans (IMF 2012). d. Recommended changes to the financial regulatory system, internationally and domestically The present global financial crisis has been greatly attributed to sub-prime mortgages that originated from the United States. During this time the house business was booming as banks lowered interest rates to attract more customers. At the same time the house prices were escalating and therefore offering sub-prime assistance to the borrowers was considered a lucrative strategy. The scenario was further complicated when some financial institutions invented some other new ways that will be applied in the sub-prime mortgages and were further introduced to other foreign investors all over the globe. The situation turned worse when the prices started dropping drastically and consequently leading to defaults in mortgage loans. Following this review , it has been found out that there are three major reasons for the financial crisis that is facing the world currently and they include: inadequacy of different banks to enact different policies to manage their risks, existence of many and complex financial instruments to apply and finally, the dominance of speculation in the financial markets. Following this situation therefore, the following four recommendations have been forth to help financial institutions and other policymakers to overcome the recurring global financial crises: first and foremost, there is need to base financial risk analysis on realistic assumptions which also take into consideration the risks involved when the prices of different properties fall. This is to avoid investing in unworthy projects. Second, there is need for the financial institutions to do away with their greedy and have realistic expectations instead of rushing into quick deals for higher returns. Third, there is need for the banks not to underestimate the risks involved when using very complex financial instruments to benefit their businesses. Lastly, the financial institutions ought to be fair and just by doing both quantitative and qualitative risk analysis in order to avoid those situations where the banks only over-rely on quantitative analysis and forget about the assumptions involved (Burton 2008). f. How these changes would help to fix existing gaps in regulation and supervision and other issues In addressing these issues, the financial institutions, will stand a better chance in identifying the underlying risks before making any investment decision. First, the financial institutions’ ability to analyze financial risks based on the underlying principals, more than any other thing will create a good environment for predicting the factors that are likely to affect the returns is it positively or negatively. Second, working on realistic expectations, will be very fruitful in helping the financial institutions to invest in various ventures rather than investing in one line where one single risk can cause very serious harm to the business. Third, underestimation of the associated risk of a given financial instrument is a clear indication of how banks ignore important parameters such as the inability to repay for their loans (Bebchuk 2008). Given the different financial instruments, it’s always easy to rate the customers highly and therefore qualifying them for mortgages. Taking into consideration of the complexity of the financial instruments, helps sought out underlying challenges as credit worthiness. Finally, application of both quantitative and qualitative risk analysis models will help banks in identifying existing assumptions such as the continuity of flow of liquidity. Finally, addressing these recommendations, will enable the banks avoid faulty risk management strategies. Conclusion In conclusion, the most challenging issue with the current financial crises is their escalation to the other economies. What has come as a result of the financial crises is recession because of the overdependence on the consumer demand and high levels of investments on debts. Even after so much coordinated effort to ensure recovery from financial crisis in major world economies, it’s surprising that still the world financial situation seems to be very weak. This has been attributed to poor implementation following perpetration politics that is witnessed amongst different stakeholders. References Adalet, M 2004, Capital Flows and Financial Crises: A Historical Perspective, University of California, Berkeley. Amyx, J 2004, Japan's Financial Crisis: Institutional Rigidity and Reluctant Change, Princeton, NJ: Princeton University Press. Bardhan, A 2008, Of Subprimes and Subsidies: The Political Economy of the Financial Crisis, Berkeley, Haas School of Business, University of California. Bebchuk, L 2008, A Plan for Addressing the Financial Crisis, Cambridge, MA: Harvard Law and Economics. Burton, T 2008, Financial Crises and Periods of Industrial and Commercial Depression, New York, BN Publishing. Dipak B 2011, The Economic Voice: Occupy Wall Street: The World Economic Crisis and its Solutions, viewed 10th April 2012 from, http://www.economicvoice.com/occupy-wall-street-the-world-economic-crisis-greek- debt-and-its-solutions/50024916#axzz1reN908Il Goodman, L et al 2008, Subprime Mortgage Credit Derivatives, Hoboken, NJ, John Wiley & Sons. IMF 2012, Underscores Deeper Partnership with Asia to Cushion Impact of Global Economic Crisis, Press Release No. 12/10, January 16, 2012, viewed 10th April 2012 from, http://www.imf.org/external/np/sec/pr/2012/pr1210.htm Nesvetailova, A 2007, Fragile Finance: Debt, Speculation and Crisis in the Age of Global Credit, New York: Palgrave Macmillan. Volkan, E 2008, Emerging Market Financial Crises, Investors and Monetary Policy, California, University of Southern California. Read More