Assignment on Corporate Financial Management

Added on - 28 May 2020

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Running head: CORPORATE FINANCIAL MANAGEMENTCorporate Financial ManagementName of the studentName of the UniversityAuthor note
1CORPORATE FINANCIAL MANAGEMENTIntroduction:Financial crisis is one of the economic phenomenons that seem to occur in a cyclicalprocess. With ever-increasing connectivity among the different economies, effect of the financialcrisis now a days have far reaching effect more or less on every economies. It not only affectsthe epicentre of the economy, moreover spreads like an epidemic throughout the various othereconomies leading them towards a dwindling situation (Bénétrix, Lane and Shambaugh 2015).Among many economic crises, Global Financial Crisis (GFC) of 2008 is a remarkable one,owing to its magnitude, range and effects. It not only crippled the economy of the United States(US) moreover, affected almost 8 countries from European Union (EU) along with Mexico,Egypt, South Africa, Japan, Australia, New Zealand and several other countries worldwide(Dijkstra, Garcilazo and McCann 2015). GFC is acknowledged as the second largest globaleconomic crisis next to Great Depression of 1929 due to its magnitude and far reaching effect.This essay is going to analyze the effect of GFC on the various countries and trace out the reasonfor its occurrence. Besides this, it will try to find out the whether there is any possibility to occurGFC again or not. To conclude, the essay will analyze various reforms taken by the governmentto control the GFC and proposed reform to make the world economy better.Possible causes of Global Financial Crisis:GFC is one of the largest economic disasters that shook the whole world gradually. Since2006, there were various signs that entailed the US economy regarding the occurrence of thisfinancial disaster; however, government authorities deliberately overlooked them (Claessens, andKodres 2014). Once the effect of recession started to phase out, there were various studiesregarding the possible caused of GFC. Most of them have similarities to some extent; however,each research came up with different theories regarding the possible reason of GFC.
2CORPORATE FINANCIAL MANAGEMENTAccording to the Harvie and Van (2016) one of the main reasons for the global financialoutbreak was real estate bubble of the US economy that deliberately brought in the subprimemortgage crisis into the economy since 2006. Back in 2004, Federal Reserve enhanced the FedFunds Rate and it effectively decreased the housing prices. This reduction in prices of the housesmade it affordable to the US citizens and the demand started to rose gradually, which ultimatelyforced the price of the affordable houses to go up. Community Reinvestment Act aided therealtors to enhance the supply of the house and grabbing the opportunity, lenders started toprovide loans at 100% or more than the real value of the new houses. Besides this, banks of USfound that it is more beneficial to sell derivatives than providing loans. Capturing the opportunityof unregulated derivative market, US banks sold derivative in a large amount overlooking amajor concern; if the derivative business needs to be continued, then the banks requiredcontinued flow of mortgages (Kapan, and Minoiu 2013). Once the prices of the houses startedto fall, supply suppressed the demand, which trapped the owners into the cobweb of mortgageand the flow of newer mortgages started to reduce. In order to check this, banks reduced theirlending standards; however, the breaking down of the mortgage framework already has beenstarted. Once the boom in the mortgage sector ended back in 2006, cost of the derivatives startedto decrease. Everyone now wanted to cash their securities; however, banks did not have thatmuch cash during that time leading to a chaos in the economy.According to the researches of Treeck (2014), income disparity among the US citizens isone of the main reasons that lead the economy towards this vicious cycle. With rise in Fed Rate,houses become cheap, however, excessive demand lead to higher price. One the other handrealtors provided loans to the house buyers at a higher rate and invested all the money intoderivatives that become plumped, once the economy started to cripple. Income disparity lead to
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