Corporate Financial Management: Causes and Impacts of Global Financial Crisis

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
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1CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Introduction:...............................................................................................................................2
Examples of Financial Crisis.....................................................................................................2
The new Triffin Dilemma:.....................................................................................................2
Lehman Brothers Failure and Balance of Payments:.............................................................3
Collapse of Financial Markets:..............................................................................................3
Possible Causes of Financial Crisis:..........................................................................................4
Would GFC happen again?........................................................................................................5
Impact of GFC in economies of different countries including the home country:....................6
Proposed Reformations:.............................................................................................................7
Conclusions:...............................................................................................................................8
References:.................................................................................................................................9

2CORPORATE FINANCIAL MANAGEMENT
Introduction:
The international financial crisis and the economic crisis of 2008-09 is not well
unspoken among the government, media or in the theoretical discourse. The public hunt for
the guilty without understanding the difficult causes of the disaster (Lane and Milesi-Ferretti
2018). A large part of the people believe that the culprits are the bankers, bonuses, greed,
fraud, speculations and corruptions. While others have hinted that human failures in making
contingent decision such as the failure of Lehman Brothers. Majority of this is neither wrong
neither correct.
The credit crisis directly resulted in the decline of the mortgage market in US. When
the FED (Federal Reserve of America) undertook the decision of reducing the rate of interest
by 1 per cent to cover the negative impact of growth in the economy led to the
commencement of the problem (Balakrishnan, Watts and Zuo 2016). The financial crisis has
resulted in indebtedness and collapse of numerous banks and financial institutions not only in
US but also across the world. The paper would discuss the possible causes of financial crisis
and impacts of crisis on different economies. The paper would also propose reformations to
avoid future crisis as well.
Examples of Financial Crisis
The new Triffin Dilemma:
A system was proposed by Triffin governed by the IMF that would produce special
rights of drawings as the new artificial currency basket which would substitute more for the
dollars and hence transforming the IMF to central bank (Bénétrix, Lane and Shambaugh
2015). The assumption that dollar is not threatened by the hard inflation the federal reserve
can pursue the fully autonomous monetary policy for external valuation of dollar. This
system gave rise to number of adverse incentives. For US it flooded the economy with the

3CORPORATE FINANCIAL MANAGEMENT
inflow of capital and resulted in the overvaluation of the real exchange rate which was
relative to the current account deficit of US.
The Triffin Dilemma resulted in the flooding of the US financial sector where both
the risk seeking and the risk averse external capital flows led to high demand for the financial
products of different types and promoted unsustainable, dangerous macroeconomic regime
based on the asset bubbles (Sui and Sun 2016).
Lehman Brothers Failure and Balance of Payments:
There was not any direct effect of Lehman failure on the domestic and the financial
sector due to the limited exposure of the Indian Banks. The failure of Lehman Brothers
resulted in the sell-off of the domestic markets by the portfolio investors leading to
deleveraging. There was also the large amount of outflow of capital by the portfolio investors
and parallel pressure from the overseas exchange market (Carson, Fargher and Zhang 2017).
Whereas the overseas direct inflows reflected resilience and the access to the trade credits and
commercial borrowings became difficult. The net amount of capital inflow in 2008-09 was
reduced substantially with significant depletion of reserves. There was a reserve loss of US
$38 billion from the US $58 billion in 2008-09 reflecting a loss of valuation.
Collapse of Financial Markets:
The financial crisis led to direct failure in the mortgage market of US as FED’s
decision of reducing the interest rate to 1% led to negative effect on the economy. The excess
amount of lending resulted in the higher demand of new houses among the Americans. This
gave rise to boom in housing market and price of house tripled (Lane and Milesi-Ferretti
2017). The investment banks categorized the loans and selling it as financial derivatives.
However, the defaulters for Sub-prime loan increased and investment banks were unable to
find buyers. This led to higher supply over demand and price of house began falling. This led