Financial Crisis and Corporate Governance - Essay Example

Various responses can be used to address the financial crisis. Short-term responses can be used to mitigate the effects of the financial crisis in the short run while long-term responses can mitigate the effects of the financial crisis in the long run. Improved corporate governance mechanisms can help business organizations to mitigate the negative effects of financial crises thus remaining competitive (Kindleberger 57).

• 2.0 Definition of Financial Crisis

A financial crisis has been defined as an economic situation when the supply of monetary resources is outpaced by the demand for monetary resources. As a result, liquidity within the economy declines substantially since available monetary resources are withdrawn from banks forcing banks to collapse or to sell out other investments to address the shortfall. The financial crisis has also been defined as a rapid deterioration of various financial indicators such as asset prices and short-term interest rates. Normally, the financial crisis is accompanied by the failure of financial institutions (Kindleberger 5).

• 3.0 History of Financial Crisis

The first financial crisis since the 20th century was experienced in the 1930s when the world was hit by an economic downturn. This financial crisis was named The Great Depression since it affected the economy of the world from 1929 to 1940s. This was the largest and most severe financial crisis in the 20th century. The great depression originated in the United States on 29 October 1929 when the stock market crashed. The depression had severe effects on virtually all countries irrespective of their economic status. Specifically, Australia was hit hard by The Great Depression since it depended more on industrial and agricultural exports. Reduced prices and export demand posed substantial downturn pressure wage rates and employment rates. As a result, the unemployment rate in Australia reached its highest record of 29% in the year 1931. However, a gradual recovery of the economy was experienced in the year 1932 due to an increase in meat and wool prices (Joseph 1049).

In the year 1973, the world was also hit by another crisis caused which was named the 1973 Oil Crisis. In the year 1973, the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo to protest against the United States' decision to support Israel during the Yom Kippur War. The embargo led to dramatic inflation as well as a stock market crash thus suppressing economic activities in most countries. However, the economy began to recover in 1974 as soon as the embargo was lifted due to negotiated settlement of Israel and Syria. Another financial crisis occurred in the early 1980s when Latin American Countries were unable to repay their foreign debt since it exceeded their earning power. The Latin American Debt Crisis began when the international financial markets became aware that the Latin American Countries were not in a position to service their loans. As a result, financial markets halted their lending to Latin American countries. As a result, Latin American experienced a negative growth rate per capita of almost 9%. However, the Latin American Debt Crisis had some positive impact since it led to the collapse of dictatorships regimes in the region (Joseph 1051).