The Global Financial Crisis Definition - Term Paper Example

Name Course Tutor Date Literature Review on Global Financial Crisis Introduction Recessions in the global economy are recurrent and they take a toll on nations from time to time in their economic endeavors. The world economies take a form of a cycle which is characterized by booms and recession influenced by the largest economies in the world. When the economies of superpower economies are not performing, their effects are felt all over the globe and have negative effects, especially on developing nations the magnitude of effects are felt differently depending on the macroeconomic vulnerability, preparedness and exposure. Government policies and economic strategies can help cushion countries against the detrimental effects of the world financial crisis. Though financial crisis is inevitable in such situations, countries can only come up with ways to prevent eminent collapse of economies. For instance, some areas that are prone to crisis have survived global financial slumps through policies that the have learned from previous similar situation. Economies have tried to understand how the global financial dynamics work given the fast pace of trade and globalization. This way, forecasts can be made and crucial decisions made on where the economy should focus its attention. For planning purposes, global financial crises are studied to look art past experiences and how they were averted. The most recent and one of the worst global financial crises came in 2007 and 2008 when the global economy went on its knees. Economic vulnerability and the financial crisis Given the impact of the financial crisis, both developing and emerging markets are not spared. This is usually evident as frequent adjustments are made on the GDP forecasts and targets that are achieved. Studies across a number of countries show that indeed financial crisis in the world impacted on their growth roadmaps. In some cases the situation was severe than in other. The impact was heavily dependent monetary and fiscal policies that were employed by the central governments. Another issue that was evident in determining the extent f the effect of the global crisis s the international monetary aspect especially on exchanges rates and matters relating to import and exports. Countries that had leveraged more of their domestic assets and those that had vigorous lending strategies to the private sector were most hit by the crisis and their targets were severely downsized. The balance of trade between trading nations was also one of the determinants of the extent to which losses were suffered. Dealers in consumer goods were less affected compared to dealers in manufactured goods meant for industries such as construction and industrialization. However, in all these chaos, some emerging markets were unshaken by the events and were actually registering positive growth. This further entrenched their position in the global economies and took the lead when the crisis eased (Berkmen, Gelos and Rennhack 2). The dynamics of the global financial situation in regard to exchange rate and frequency have also been cited as some of the main determinants of the effects that global financial crises could have. Most affected countries are characterized by weakening currencies and reduced trade. Foreign exchange regimes determine the level of severity that global financial crisis take on countries. In light of this, pegged exchange rates experienced worse effects than those that were flexible. This is because trading nations preferred to buy commodities from cheaper countries where the exchange rate is allowed to be determined by the forces of demand and supply. Pegged rates do not allow flexibility and when rates fall, common goods and services remain pensive in these nations. In cases of a global financial crisis, they lose their trade to competing nations whose prices are cheaper. A good example in this view is the emerging markets of China and Asia. Many importing counties turned their attention from the European and American markets as they sourced cheaper goods from Asia and the Middle East. Another underlying factor is that imports become relatively expensive and there in nothing that can be done apart from changing the regime from a pegged one to a flexible one. Even with flexibility, there comes vulnerability and possibilities of exploitation especially for weaker economies in developing countries. Countries that are able to withstand the pressures of the crisis also tend to have stronger fiscal policies that enable them to maintain significant age rates and revenues from taxation. The fiscal policies cushion people to some extent on issues of high rising costs of living and doing business. It such regimes, it is possible to identify opportunities in the market, both internally and externally that can alleviate the problems, even if it is in the short term. The effects of the crisis are eminent and are felt years after the crisis has eased. Some economies never fully recover and the effects are so severe that they remain deeply enrooted in debt and unemployment levels. Issues such as foreclosures on mortgages are common with people losing their homes due to inability to repay bank loans. This situation is very real given the aftermath of the 2007-2008 crisis. The world, bank in 2009 conducted a study that was meant to reveal the after effects fog the 2007- 2008 global recessions. It examined the structural factors that were affected during the recession and the aftermath reflected in the difference between projections and actual figures of 2009. The study found out that regimes of fiscal, international and exchange rates were crucial in determining how countries responded to the crisis. Nations with high financial vulnerabilities were found to be the most ht as they seemed wobbly on policies that should have been applied. Particularly, the role of trade in the crisis came into play and countries that had an upper advantage over others in terms of trade were able to reduce the effects through their volumes of trade. In Europe, a comparison of major trade powers in terms of growth between 2007 and 2009 revealed a number of issues that led to slowdowns. Factors such as debt liability, reduced trade, exchange rate appreciation and political environments were found to be the major contributors (Berkmen, Gelos and Rennhack 3). Global financial and trade associations with international partners are some of the key issues that determine how economies react to global financial crises. Countries take short term measures depending on their vulnerability and ability to effect quick changes depending on the flexibility of their policies. This is also dependent on the operating macroeconomic procedures and structural infrastructure aspects that governments have invested in. Financial systems and monetary regimes determine how the shocks of the crises will be transmitted to every individual country. How the systems react will depend on the financial vulnerability and how the economy responds, given the strength of monetary and fiscal policies (Berkmen, Gelos and Rennhack 6). Corporate governance and the global financial crisis In studying the recent global financial crisis, it is crucial to study the factors that may have caused it. Macroeconomists and financial experts argued that the situation was an accumulation of underlying factors that came to explode finally in 2o78. Further, speculative trade was also blamed for the crisis as business opted not to invest in volatile markets hence leaving lots of assets lying idle and unused. There was also a panic attacks as shareholders in large companies in stock exchanges all over the world started selling shares at throw away prices fearing eminent losses. Close scrutiny of the financial crisis between 2007 and 2008 reveals that corporate governance in major corporations all over the world could have caused the financial crisis a study carried out in 296, major corporations in more than 30 countries revealed that large corporations were in the middle and actually fueled the crisis. Corporations that had independence board leadership and were institutionally owned were worst hit by the crisis. In the fiscal years preceding the crisis, firms took huge financial risks in investing in volatile markets and making ambitious expansions (Erkens, Hung and Matos 392). When the crisis hit, their shareholders were worst hit by the low share prices and negative dividends. It as also notable that firms which had shown independent in boards were able to raise reasonable and more capital, hence transferring wealth created form shareholders to debtors. As a result, many corporations collapsed and in some cases, governments had to come in to save the situation. However, this was highly dependent on government policies on stimulus programs. Furthermore, the ability of most governments was overstretched by the fact that they could not collect enough revenues. No country at this time would extend grants to another, given that the situation affected almost every nation. Even worse, the global financial system was frozen and banks were stricter in lending credit especially at such a time while most institutions were underperforming. The only saviour that was left was governments, though their help was strict and limited. The attention was drawn to this issue as the performance of corporations employing corporate governance we worst hit by the global crisis. Independent leadership and directorship in corporations applied strategies where management was forced to increase shareholder returns by taking greater risks in the markets. Previous events and immense growth in the industry was tempting enough to lure managers to make risky decisions as they had done in the past. The opportunities were also vey lucrative and shareholders ere guaranteed of returns on their risks. What they did not realize ids the social costs that were associated with such risks. Another aspect is that they did not realize that mangers tend to take lower risks levels than shareholders due to the human capital aspect of shareholders. Prior years to the crisis, banks and other financial institutions changed the way they compensated CEOs and managers as a challenge to them to exploit new ways of increasing growth opportunities in their portfolios. This led to risk taking maneuvers that led which increased vulnerability of these corporations. When the crisis hit, managers were under a lot of pressure from owners and shareholders to raise capital in their institutions. The capital that was raised from shareholders was transferred to debt holders and was used to pay other expenses. This is the disadvantage of raising capital when stocks are low. To further aggravated the state, the situation was accompanied by abnormalities in stock transfers and drop in credit default swap Though raising equity capital led to decline in performance and profitability, it helped some firms survive through the crisis and return to positive performance after the recession was over. Additionally, the survival depended on how equity was raise and for what purposes. Those that raised it and used fit to repay debts collapsed while those that used capital to build on strategic ways to keep afloat survived. Some researchers stated that the over enthusiasm in the corporate world led to the crisis. Firms ended up in deep debt crisis and non performing goods and services. Coupled with some other internal and external forces, corporate governance accelerated the effects of the global crisis. The situation may have been different if the global economy was not slowing down. This is why some firms were affected more than others; others collapsed while others survived the crisis and beyond. The worst hit institutions did not have any choice but to seek help from governments in stimulus programs. The competition for these programs was immense as the crisis had affected almost all sectors in the economy (Freedman, Kumhof and Laxton). Conclusion The recent global financial crisis of 2007-2008 is one of the worst since World War II. It affected every entity from governments, institutions and individuals. Among the many causes that may have led to the crisis, it is a case of different situations accumulating to one turbulent situation affecting all avenues. In trying to cope with the crisis, governments put in place protective measure to protect their citizens. However, there is not much that they could do especially with the presence of liberalized markets. Corporations and huge firms were worst his especially due to loss of jobs and deep debt crisis. The few lucky ne got some assistance through stimulus programs from governments. With all these challenges, the final blow affected the common citizens who lost jobs, homes and livelihoods. Unemployment levels rose and the situation has not eased for some individuals up to date. Firms played a key role in the crisis, though this was accelerated by the effects of vulnerability, fiscal and monetary process Bibliography Berkmen, Pelin, et al. "The Global Financial Crisis: Explaining Cross-Country Differences in the OutputImpact." International Monetary Fund (2009 ): 3-10. Erkens, David H, Mingyi Hung and Pedro Matos. "Corporate governance in the 2007–2008 financial crisis:Evidence from financial institutions worldwide." Journal of Corporate Finance 18 18 (2012): 389–411. Freedman, Charles, et al. "Global effects of fiscal stimulus during the crisis." Journal of Monetary Economics 57.5 (2010): 506-526. Read More