Lessons From The Global Financial Crisis
First Published: ADawnJournal.com December 6, 2009
The world has once again found itself in a terrible financial meltdown that has gone to affect the whole world and the consequences are only now trying to reach the ends of the planet, with each nation getting to a feel its share of the pain. This has been a long way in coming since the last such crisis which was somewhere just at the end of the Second World War. Even though there a signs of a recovery from a distance, we are yet to get out of the woods and one would say that the developing countries in particular are going to be hardest hit for reasons that they get affected by things that happen in the first world, even when they are mere spectators most of the time.
A good many people have this feeling that the current crisis was directly caused by the poor macroeconomic policies of the United States which must have led to the decline of local saving rates because of an extremely lenient money policy. This it is noted resulted in a housing boom in the US and most of the developed world and because of poor lending standards, the downfall was not too much for anyone to predict and so obviously in a little while the credit crunch was upon the Americans. It did not take long before the ramifications got to be felt in the rest of the world for the simple reason that the world is now so interconnected financially and otherwise.
It may appear that we have reached a point in time when supervision and proper regulation needs to be considered extremely carefully if we are to get out of the current crisis, leave alone avoiding a similar one any time in the future. In many countries we saw the rise of a shadow financial system for long time, which included mutual funds in the money market, private equity and hedge funds. The challenge was the use of this short term measures to fun long term investments which may not have been the wisest thing to do in a generation that is so informed like ours.
Banks will also need to get back to their standard and regulated practices, because the trend they got into of trying to compete with the smaller financial institutions which have no regulations whatsoever was a great contributor to the plague of unplanned lending worldwide. This automatically led to the over leveraging of the world’s financial system in the US in particular but also the rest of the world in varying degrees. In a little while confidence went under and it brought an abrupt stop to funding which led to the systematic collapse of structures as we know them.
We are going to need to work out fresh new forms of financial management which are going to encompass not only local financial challenges but those that will have to look at the big picture of the global financial market. The new forms of financial engineering will need to be those that are going to look at credit risk in a completely new way which is a basic requirement in any healthy financial market.