Global Financial Crisis: Misconception And Mismanagement Of Risk (Essay Sample)

Global Financial Crisis
Name
Institution
Date
Introduction
Global Financial crisis is one of the most challenging situations in the market. When such situation takes place, it limits money circulation, hence businesses do not perform very well. During this situation some businesses tend to close down or even run at losses, this is because there are no good returns. It does not have a specified period when it occurs, or the duration that it takes when occurs. Hence this becomes a great challenge since the business people cannot predict the state of the market in future, so as to base their targets on it. Global financial crisis is a worldwide period of economic difficulty experienced by markets and consumers. The consumers usually tend to reduce their purchases of goods and services until the economic situation improve. It refers to a situation whereby the consumers will only buy or purchase things that necessary and in minimal quantities. This hurts many businesses since they cannot sell their stock as before, especially those dealing in perishable products will not survive in the market for long. This situation also hurts the consumers as they tend to spend a lot but can only purchase limited goods. The consumers do not have alternatives but to undergo extreme expenses. The global financial crisis has occurred in various countries, and these are some of the causes,
Governance
The financial system is expanded, and it is impacting all citizens; hence democratic governance becomes very essential (Sharma,2003). Therefore the financial system should involve all the citizens and not only a few. Especially the stock exchange, whereby the trading only benefits a few at the expense of others. If civil society were democratic, it would not allow for high-frequency trading that only benefits a few. Being that this happens this causes the financial crisis. The rich get richer, and the poor people suffer. They have no place or rather not given priority anywhere. They are not included in the running of the economy they go as per the economic condition. Hence this destabilizes the economy. And after the economy is destabilized the common citizen still suffers. There should also be improved efficiency or improved liquidity. System resilience is the most important objective.
Taxes and subsidies
Tax policy significantly impacts on the cost and flow of capital as it affects financial needs (Bernanke, 2013).There is the need for progressive capital gains that has the effect of encouraging long-term investment over short-term speculation. The subsidy that is provided to retail especially through banks should be recycled back into the mainstream of the economy rather used to subsidize speculation. There should be measures put in place to ensure there is no evasion of tax. The evasion of tax by the big organizations or companies in the market is what leads to the financial crisis. Since they do not pay their taxes, there is no income to the government which in turn hurts the economy at large.
Misconception and mismanagement of risk
When there are a stabilized economy people perceptions of risk diminish (Blinder, 2013). People convince themselves that the good economy will remain the same even in the future. But when the cycle turns the risk aversion increases again. The borrowing of assets becomes lucrative when asset prices are rising; this is because the interest cost goes to the investor. But when the asset valuations are falling investors loses. Due to the misconception of stabilized economy throughout, there are no standby measures put in place to curb this problem when it crops up in the future.
Lack of appropriate financial regulation
These include capital requirements on financial products such as collateralized debt obligations which include, the way the credit rating agencies have been regulated, use of ratings provided by the private sector rating agencies in the regulation of banks and also the structure of remuneration arrangements and the risk-taking incentives they create (Davies, 2010). Many banks failed to appropriately manage the risk involved in certain financial products and markets. This failure is also a major cause of the crisis as this reduces the effectiveness of those products in the market hence losing their bargaining power. The banks do not assess the financial products and note the risk involved in them in good market conditions and financial crisis. This should be done by the banks so as to be able to survive incase financial crisis occurs. Through the assessment, they will be able to come up with solutions on how to curb the problems when it arises.
Interest rates
Whereby there are low-level interest rates, it makes higher leverage very lucrative. At this time the inflation pressures are subdued. Hence the economic situation does not warrant much higher interest rates. This is also a cause of the global financial crisis.
How the Global crisis affected global economies and markets
Firm leverage and use of long-term debt declined
From wide economics and financial analysis, firm leverage and use of long-term debt declined is viewed to have taken place in countries termed to of high-income which first experienced the global crisis. However this is also experienced in developing countries In terms of business entities, it was significantly notable in privately held firms. It is estimated that the privately held firms that were servicing long-term debt before the crisis experienced a steady decline. It is estimated that the ratio of long-term debt to total assets declined by 1.4 percent on average in high-income countries and by 2.7 percent on average developing countries.
Decline of house market
Individuals and investors could no longer use their homes for quick profit. Mortgages longer became affordable for many homeowners, and many mortgages defaulted leaving investors and financial institutions running at losses. Depresses housing prices caused many homes worth much less than the mortgage value. This is because during the financial crisis the consumers limited their purchases. There was no quick profit from mortgages. The mortgage prices shoot higher than before the financial crisis.
Tightened lending rates
Many banks tightened their lending requirements, but it was already too late for many of them. Banks and the financial institutions merged with other institutions or were put under receivership. Other financial institutions and banks received a bailout from the government and continued functioning. Those that did not merge or even bailed out stopped working. At this time of the financial crisis even tightening of the lending rates by the banks could not bring bridge the gap regarding losses they had made.
Lack of resources
Many developing countries lack the resources to stimulate the economy and protect the socially disadvantaged populations. The economy became totally unstable and required maximum resources to enable adequate circulation to take place.
Consequences of the Financial Crisis on the GCC Region
Decrease in volume of transactions
The financial crisis led to decrease in the volume of transactions in a Muskat market. This was estimated as a decline from $26 million before the crisis to about $4 million. (Nanto,2009).This market is estimated to at about $14 billion whereby 80% is owned by the government and the funds still not in circulation. Hence the size of the real transaction in the market is equivalent to 20% of its size, amounting to $2.8 billion as estimates state. Before the crisis, the market could incur large volume transaction at a time, but after the crisis, this no longer happened.
Deteriorations on money markets
There was liquidity decrease in Saudi Arabia banking sector. Saudi stock exchange lost 22% of its value at the beginning of the financial crisis and later also lost 14%.This happened in a period of fewer than two months. This is an indicator of a huge deterioration that was faced by the stock exchange. Since the percentages lost compared to the time margin which is less than two months is a very small period. Hence the stock exchange incurred a lot of losses during the period.
Decrease in demand f...