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Global Financial Crisis Impact Analysis

   

Added on  2020-05-16

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Running head: CORPORATE FINANCIAL MANAGEMENTCorporate Financial ManagementName of the StudentName of the UniversityAuthor Note
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1CORPORATE FINANCIAL MANAGEMENTIntroductionThe worst economic disaster after the economic depression that took place in 1929 wasknown as the Global Financial Crisis (GFC, 2008-09). The deregulation that happened in thefinancial industry was the major reason that led to the creation of this crisis. The rise inunemployment and the decline in the price of the real estate were some of the major causes thatled to the evolution of GFC. It happened in the year 2007, as there was a decline in the assurancelevel of the investors present in the US regarding the mortgages of the subprime products. Theincrease in the volatility rate and the fall in the stock market were some of the major factors thatcontributed towards this crisis in 2008 of September. The collapse in the price of the houses ledto a fall in the flow of remittance on a global manner by 6 percent in 2008-09. The institutionknown as IMF reviewed a statement saying that the output level shranked to 2.2 percent as thedeveloping and the developed countries went in to a state of financial crisis (Attig et al. 2016).Nepal is considered to be not impacted on a direct manner by the effects of GFC but has felt it inan indirect manner. DiscussionPossible causesGlobal saving- The core grounds regarding the rise in the asset prices was basically thefactor of deficit that was seen in the current accounts, which prevailed in the US market. Thecountries with a deficit in their trade and current accounts were due to the increase in the savingsof the people, which curtailed the borrowing capacity and becoming a lender to the US. Theincrease in the capacity to save was seen mostly in the developing countries, as there was
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2CORPORATE FINANCIAL MANAGEMENTreduction in the investment within the capital market that created an increase in saving on aglobal manner. The markets with respect to capital in the developed places were searching forfunds, which would help in increasing the market demand along with the asset prices in the USstock and housing market. Price of houses- The decline in the price of the houses in a substantial manner was one ofthe shocks that led to the formation of global financial crisis. The period of 1996-2006 saw a risein the value due to the lower interest rates and stress of forming a fresh economy. From middleof 2006 till 2009 mid-February, it was seen that the price of the houses had declined the mostsince 1987 (Balakrishnan et al. 2016). The mortgage lending mainly attracted the wealthy peopleso that it can be help in saddling the burdens regarding the mortgages that were large in nature.Figure 1: Housing prices(Source: imf.,org 2018)Rise in subprime lending and rate of interest- There was a further increase in the price ofthe houses because of sloppy standards of interest rate for the purpose of lending, which isassociated with the global economy as well. The borrowers who had the loans were mainlysubprime lenders and the standards also suffered because of the lack in the worthiness of credit
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3CORPORATE FINANCIAL MANAGEMENTof them. The rise in fed rates resulted in costly borrowing (Dungey and Gajurel 2014).Furthermore, the cost of the buildings also created an impact, as the mortgage rate moved fromdescending to ascending rates in the market place. Credit booms- The trigger for the crisis was the major participation that the expansionrate had on credit, which kept on increasing in the market. The access for the credit increased at agreater rate as there was a boom in the market regarding the houses in places like Ireland, Spain,European countries and the UK. The recurring flux that was happening in the economy wasbecause of the rapid credit growth. The indebtedness in the housing properties also increased inthe US market after 2000 due to the slow credit growth within the economy (Bauer and Thant2015). The fiscal innovations and the mortgage finances were the major contributors that led tothe problem in housing sector indebtedness. Probability of repeating the financial crisisRegarding the job cycle theory, it can be seen that the financial crisis can be repeated inthe future. There is a possibility for this occurrence because of the stage of development, whichwould escort the market to another phase of depression.
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