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Financial crisis 2008 causes and effects : Assignment

   

Added on  2020-05-28

14 Pages2893 Words287 Views
Running Head: CORPORATE FINANCIAL MANAGEMENTCorporate financial managementName of the StudentName of the UniversityAuthor Note

1CORPORATE FINANCIAL MANAGEMENTTable of ContentsIntroduction:..............................................................................................................................2Discussion:.................................................................................................................................2Possible causes of financial crisis:.............................................................................................2Possibility of repetition of financial crisis:................................................................................2Financial crisis impact on different countries economics and Nepal:.......................................2Impact of financial crisis on share market and housing industry:.............................................2Reforms for reducing financial crisis:.......................................................................................2Conclusion and recommendations:............................................................................................2

2CORPORATE FINANCIAL MANAGEMENTIntroduction:Global financial crisis (GFC, 2008-2009) is regarded as worth economic disaster since theeconomic depression that took in year 1929. The primary cause for occurrence of such crisis isattributed to financial industry deregulation. GFC led to the evolvement of great recessionsresulting in rising of unemployment and falling of house prices. Eruption of GFC is believed tohappen in year 2007 due to liquidity crisis in light of declining confidence of US investors invalue of subprime mortgages. Financial crisis worsened due to high volatility and crash of globalstock market by September 2008. GFC was triggered due to housing collapse in US market andit led to fall in worldwide remittance flow from 2008-2009 by 6% (Ojo 2016). It has beenascertained that according to update of IMF (International monetary fund) outlook economies ofboth developing and developed countries was engulfed by financial crisis and shrinking theglobal level of output at 2.2% in year 2009 (Attig et al. 2016). Nepal is perceived to have notbeen directly impacted by GFC and there are several indirect impact. Discussion:Possible causes of financial crisis:Some of the possible causes of GFC are as follows:Global saving glut- One of the main reasons behind sharp rise in price of asset was currentaccount deficit prevailing in US and global saving glut. Countries had modest current accountand trade deficits before the crisis, there was substantial increasing in saving, and foreignborrowings were curtailed instead of becoming lender to US. Developing countries were saving

3CORPORATE FINANCIAL MANAGEMENTrather than buying into the capital market of world and this reversal has resulted in producingglobal saving glut. Advanced countries capital market were in search for investment andincreasing demand resulted in rising price of assets in US including housing and stock market. Housing prices- Substantial decline in housing price was one of the major economicshocks that triggered global financial crisis. During 1996-2006, there was increase in price ofhousing due to lower interest rate and demand pressures of new economy. In between middle ofyear 2006 and middle of February 2009, housing price started declining making it largest declinesince year 1987 (Balakrishnan et al. 2016). This fall was because mortgage lending was mainlydirected to rich and were not saddled to increasingly debt burdens of large mortgage. Bubble burst of housing price:(Source: imf.org 2018)Rising interest rate and subprime lending- Housing price rose further due toincreasingly lax standards of lending and lower interest rate that is associated with saving glut.Borrowers who took out loans were largely subprime lender and the mainstream standards couldnot be met due to their poor credit worthiness. Fed increased rate of interest that helped in

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