Global Financial Crisis on International Business - Essay Example

? Introduction The changing context in the economy is one which fluctuates depending on the alterations from dependent variables. The global financial crisis is one which created several changes within the economy as well as the context that occurred. After 2008, there were several alterations that began to occur, specifically within the economy and the way in which finances were approached. This is continuing to change because of the initial context and the instability of the economy that is still a part of the global finances. The policy implications, needs for reform and the efforts to work into a sense of recovery within the economy have all become a main proponent with the global financial crisis, all which are now creating different approaches to financial needs at an international level. Changing Context After 2008 The context of the global financial crisis began in the year 2006 when the United States experienced a downfall from the real estate market. This accumulated into the lending of banks and other sectors of the economy, all which led to an inflation of prices and the inability for individuals within the economy to continue to pay the same amount of prices because of the economic downturn. The result was a large loss of money that was in the economy and which created difficulties among those that were in the economy. There were several factors that implied that changes needed to be made and which were altered with policies, reforms and different ways of functioning through both policy organizations and those who were involved in lending functions. The context after 2008 led to ways to try to merge back into a functioning economy by changing the macro – economic variables that were associated with the initial crisis (Furceri, Mourougane, 1: 2009). When looking at the context that occurred after 2008, it can be seen that there were several specific changes within the economy that led to the alterations of what was occurring. The first was the major decline in equity and real estate, which cost over $28.8 trillion in losses and led to the inability to offer economic growth. Financial globalization reversed as a result, with the capital flow falling by more than 80%. Global balances receded as a result, followed by mature financial markets slowing down in growth. Emerging markets were not as affected; however, those who were a part of the global capital markets noted the first decline since a continuous flow that occurred from the 1980s. This particular crash was as bad as the Great Depression but caused several types of declines because of the complexity that had grown in the economic market. The most affected area was the government with a large amount of increased debt, while the private debt remained flat, making the debt to equity ratio higher and imbalanced. The several occurrences led several to question how to rebalance the economy for the future and to buffer the pressures and declines which could occur within the economy (Roxburgh et al, 7-9: 2009). The changing alternatives in the balances and global market have led to fluctuations that have not only changed the context with certain aspects of the economy but are affecting different institutions. The main institution which has been affected is the government, specifically with a rise in the deficit by trillions of dollars. There are also changes in the amount of money that is available with sovereign default, which is changing the association with how much can be done to recover within the economy. The changes that are occurring are now not only dependent on an emergence of the economy through the institutions and banks, but also are requiring policy changes that are a part of the economy to provide sustainability. The economic model that is a part of this is one which is creating a change in how policies are approached, specifically because of the credit, assets and amount of deficit that is impacting both the institutions and the basic uncertainties that are within the market (Cuadra, Sapriza, 78: 2008). Alterations in Availability of Credit The availability of credit that occurred after 2008 began to alter with what was available as well as who offered the costs for lending. The availability of credit by banks decreased; however, there was a borrowing boom which occurred. Many of the areas that offered available credit would do so by non – bank channels which were able to fund different options to restore the funding. The annual growth rate of this was 6.4% from 1990-2000 and 8.2% from 2000-2008 with even more borrowing and higher exchange rates between 2008-2009 (Roxburgh et al, 22: 2009). Even though the lending changed with most banks, there was a dependency that began to arise in the economy by unlocking credit. The only way for the economy to reach recovery was for more credit to be available, specifically so there could be advancements in rebuilding the economy. However, for this to continue, the bank credit changed from offering $3 out of every $4 to $1 out of every $3 in lending (Dash, Bajaj, 1: 2008). The changes in the amount of credit from banks have not only led to the ability to have a certain amount from banks and outside institutions. This has also led to a credit crunch among financial institutions, which has tightened the conditions and policies for being able to get the loans required from the banking institutions. Rising interest rates, checks with credit and rationing are all being used to give the amount necessary to individuals. This is leading to not only a credit crunch with what is available, but also alternative spending that is either not occurring within the economy or not coming from the main banking institutions. This particular concept is known as a leverage cycle, which causes the institutions to leverage how much money there is with the lending that is available. This is dependent on several factors, first which are defined by the micro – environment and consist of how much spending is in the environment. The second is through the macro-environment and consists of how much leverage there is for the institutions to sell and get back the investments in the economy. This creates a general equilibrium model for the spending and the amount that is available for the lending (Delong, 1: 2010). The amount of credit available is also followed by the amount of debt that is in most households. The tightening of policies and the inability to get the right types of credit have led to most not having the ability to get the financing needed. For the macro-economy, this is leading to several provisions and new policies because of the lending that most are no longer interested in receiving within the economy. The amount of debt, as opposed to the savings available, are leading to many that are no longer interested in receiving the credit needed and instead are taking precautionary measures with their finances. An example can be seen with the micro-economy debt that is being experienced by households as of 2008. (Pimco, 2010). This particular chart shows how there is an increase in debt and a decrease in savings. With this not available with the right alterations are several banks that are tightening policies as well as individuals that are trying to find funding from alternative resources that are more flexible with financing. The alterations in the credit system are causing banks to lose money and not have the capability of providing lending that drove the economy forward before (Pimco, 2010). Costs of Capital The costs of capital in the market also experienced alterations and changes in 2008. The cost of capital was altered by cross – listings and growth expectations that were a part of the recession that occurred. The cost of capital reduced from 70 and 120 basis points and stayed at this specific amount between exchange listings and across territories (Hail, Leuz, 428: 2009). Even though the points and cross – listings slightly altered, the cost of capital was the least affected in the recession and was able to remain consistent with the alterations in the economy. While there wasn’t a sense of increase that occurred, there also wasn’t an increase in the price of risk that was a part of the mergers and acquisitions in investments. Even though this didn’t change for short term investments, the long term investments were affected, specifically because of the reduction in cross – listings. The long term prices changed with substantial increases, which led to a permanent decline in the cost of capital and the lack of stability that was associated with the capital (Dobbs et al, 1: 2008). The cost of capital is one that is being followed by several inflation rates that aren’t providing the right price of risk with investments that are followed. Chart 2 shows the inflation rates that are a part of the current economy. Chart 2: Inflation Rates & Cost of Capital (FAA, 2011). This particular chart shows how the costs of capital and inflation are continuing to increase and are expected to continue through 2013. However, the funding that is available is not provided with the funding because of the amount of credit that is available. This is providing a different set of estimates with the cost of capital which is available as well as how funding is provided. The cost of capital is then able to not produce a return because of the amount of inflation as well as the lack of investment that is a part of the current economy. The ability to provide investments without the available credit then becomes problematic in how much is available for the businesses, industries and the macroeconomy, specifically which results in an increase in inflation and the lack of funding available (FFA, 2011). Changes in Asset Prices The asset prices also altered from 2008 because of the changes occurring in the economy. The number of assets as well as deposits increased within the economy, specifically with equity securities, private debt securities and bank deposits. In emerging countries, this was at an average of 29.6 and in mature countries there was a 146.8 in growth, showing a 31% and 69% amount in growth respectfully (Roxburgh et al, 29: 2009). This specifically began to alter the assets available with asset bubbles because of the amount of investment that was required within the financial changes. The most important component was that the assets didn’t decrease from 2006 when the financial crisis started, but instead increased in terms of savings in banks. The lack of assets by consumers led banks to holding extra assets that were no longer being claimed as well as several finding different ways to hold onto assets in a different manner. The economic flow then reached the asset bubble, which led to too many assets being available and not enough being given to the economy for investments. For lenders, the government and others involved in the regulation of assets, was an offset with the available assets and the inability to make a profit from the assets (Shiller, 2008). The asset bubble is one which is further evaluated by the macro-economy and the ways in which the investments and requirements have altered available options for the rest of the economy. The gross domestic product of the US in 2006 was at 7% and declined by 2008 to 5%. Even though the asset bubble was increasing, the GDP continued to decrease, showing that those who had assets were holding onto these instead of spending on the economy. For the government and lenders, this led to the inability to have more flow within the economy. The result was exchange rate shocks and traditional structural models that were no longer effective in creating trade. The impulse response that was created as a result was a 10% rise in the equity prices with a lower amount of trade balance that was available for those that were looking into the rate depreciation. Asset price shocks then followed with the changes in the GDP, rise in equity prices and the lack of assets that were flowing in the economy. Each of these became dependent variables on creating an alternative effect within the economy (Fratzscher, et al, 3: 2008). Exchange Rates Volatility The exchange rates volatility is another aspect that has altered since 2008. Before 2008, there were higher exchange rates that were occurring. However, the overall exchanges between countries decreased drastically beginning in 2006 because of the economic fluctuations that occurred as well as the uncertainties associated with this. In 1999, the ability to exchange across borders was only beginning to open into the market, with most still going into local economies for exchange. By 2006, there was a large increase in the exchange, specifically with rises in cross – border investments. This was furthered with the US, Western Europe and Japan offering the most investments with 54,912 billion, 47,341 billion and 26,166 billion, respectively. While this number noted a growth from the past economy because of the opening of borders, 2008 experienced a slight recession in the amount of exchange and activity between borders (Roxburgh et al: 18, 2009). The slight decrease in 2008 directly affected the macro – economy as well as the amount of growth that was occurring in the different economies. The productivity growth that occurred during this time decreased from the life cycle that was propelling forward. With the productivity decrease, was also a decrease in other arenas with the inability to compensate for the decrease that occurred. As can be seen from chart 3, there is a growth in the banking sector while not having the right productivity growth across borders. This is creating a different alteration in the amount of finances that are available as well as how much flow can move outside of the banks, for lending, investments and for the cost of capital. As this alters, so does the exchange rate volatility that is associated with the different countries. The volatility that was a part of the different economies then created a different approach to the need to exchange between different countries. The simple monetary growth model is one that shows that there were several negative investment effects that occurred because of the recession and which altered the domestic credit markets as well as the measures of financial development that were taking place during this time (Aghion, et al, 494: 2009). Uncertainties The several factors which have led through the different fluctuations in the economy have led several to try to find a way to stabilize the economy from the several instabilities that have occurred. The activities that have taken place at both a macro and micro level have begun to alter the way in which most are looking at how to recover the economy and work toward growth within the economy. A theory which is now being questioned is based on the traditional methods of determining certainty within the economy. This states that there is a life cycle within the economy that moves through several booms and downfalls to stabilize the amount of wealth that is within the economy. However, the current downfall has created a question with the effectiveness of the life cycles in the economy as well as what is available. Social problems, cultural changes and the influx that is taking place from an alteration in behaviors within the economy are changing the life cycle of the economy and the fluctuations which are required for the needed economic reform (Minsky: 3, 2008). Another question and uncertainty that is occurring within the economy is based on the ability to move into growth as well as the risks which follow this. The cross – trades, exchanges and the habits of several in the economy has altered. More important, the amount of lending and the banking methods which are currently used are no longer able to hold the same economic options that were available in the past. The question which is arising is coming to the micro-economy, which requires more developments to be available to stabilize the economy. As this occurs, more industries can develop investments and change the assets from savings and into the development of more infrastructures. The impact that this will create with both those who are in the financial crisis as well as others which have gone through the economic ties will then provide more certainty with the growth of the economy. For this to work effectively, there is the need to create a system which can enhance the development of infrastructures and areas that are not central, such as banking, for more lending, funding and asset development which can be available to others. While this changes the infrastructure, it takes away the uncertainties of the fall from the economy (Bryan, Farrell, 1: 2008). Another uncertainty that has been created is from the monetary system and policies that are no longer able to sustain the economy. Even though there is a slight downfall in some areas, the monetary policies can’t withhold the changes in activities, which were dependent on a different system and infrastructure within society. The term structures, finance models and lack of evidence of the policies for interest rates and sustainability with banks are creating uncertainties in how the banks can recover from the economic downturn that has occurred. The macroeconomic dynamics are being questioned by linear functions, which show each of the areas as impacted by a straight and independent line. The yield curve and bond pricing is furthered with a question of movements that are a part of the economic nature and the term structure that is associated with this. A no – arbitrage model, which shows how the term structures were able to retrieve different financial concepts, then creates a macroeconomic representation of output and inflation. The model shows that the financial structures and policies can’t alter or change the economic downturn that has occurred because of the continuous growth in inflation and output that is still rising within the macro-economy (Rudebusch, Wu, 906: 2008). Conclusion The concepts that are in the economy have fluctuated since the beginning of the economic downturn in 2006. The changes which have taken place in 2008 and beyond have led to several continuous fluctuations that are continuing to leave the economy with inflation and a recession. The changes occurring are altering the economic cycle and policies that are associated with the economy. The micro-economic patterns of assets and investments, as well as with work are one of the alterations that are occurring. This is followed with macro-economic changes in patterns, such as cross-exchanges, rates that are across cultures and the slight decreases in the global exchanges that are a part of the economy. This is leaving a set of uncertainties with the patterns in society as well as how many are approaching the ability of working toward new solutions to recover the changes in the economic patterns within the society. References Aghion, Philippe, Philippe Bacchetta, Romain Ranciere, Kenneth Rogoff. 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