Case: The Global Financial Crisis and Its Aftermath: Declining Cross-Border Capital Flows
Do you think that something like the financial crisis that occurred in 2007-2008 could happen again? If it did. What would the impact be on the ability of firms to raise capital to fund investments, and on the global economy?
The financial crisis, which was observed in 2007-2008, can occur again, and global corporations and financial institutions must be ready for it. It has been revealed that global corporations, especially financial institutions, have not recovered after the 2008 financial crisis. Now, if these crises occur again, it will be tough for corporations to raise capital to fund investments. In the global economy, corporations are still suffering due to limited or recovering financial reserves. If this crisis occurs again, corporations will not be backed by these financial institutions. The ability of firms to raise capital is not up to the mark because they are burdened with higher debt. However, the chances of financial crisis seem low, as compared to back in 2007 and 2008. Financial institutions are now intending to increase their ability to raise capital by taking or depicting aggressive steps in the global markets. Nevertheless, it is still a significant risk to expect a financial crisis, and it may hit the global economy harder than before.
In retrospect, were central banks justified in stepping in as aggressively as they did to shore up the global financial system? If they had not done so, and instead let more large financial institutions fail, what would have been the consequences?
The role of central banks was justified, as they stepped in aggressively to shore up the global financial system. For Instance, it has been revealed that central banks did not contain an effective governance system and competence to make the difference. However, due to the intervention of government, these banks justified roles. Even in the financial crisis, these banks played their role aggressively. Even with the uncertainty of return on investment, aggressive policies were implemented by banks. It is a fact that banks regained growth lightly due to the government’s support. It may compel large organizations to fail, but it is still debatable. If the government does not help these banks to grow, then it is quite tough to recover. Recovery or institutions will be the big challenge without government’s interventions or support, and it may also reduce the role of the bank in crisis or even after the crisis.
How can the risk of occurrence of crises such as the 2007-2008 global financial crisis be mitigated in the future?
Some strategic considerations can mitigate the risk of occurrence regarding the possible financial crisis. First, the risk can be mitigated by monitoring or evaluating the prices of different assets. Interestingly, asset bubbles may also occur, even before the financial crisis. Therefore, it seems imperative to conduct a practical price evaluation. Another strategic move to eliminate the risk and analyze the lender is the appraisal system. Before lending, it is mandatory to do an appraisal to evaluate lenders, as it is better to secure the loans. The robust appraisal system can work for companies to emerge stronger from the possible financial crisis. In an economy, the risk can be mitigated by coming up with some strict policies or penalties for people who conduct white-collar crimes. Crimes such as money laundering and corruption must be reduced to depict an adequate financial capital in the financial crisis. Also, integration with both local and regulatory agencies is the right approach to minimize the risk and survive in financially complex situations.
Why do you think that global capital flows were still significantly below their 2007 peak seven years after the crisis hit? What are the implications of this for the ability of multinational firms to finance their investments by raising outside capital?
Global capital flow was still significantly below their 2007 peak seven years after the crisis hit. The key reason regarding these global capital flows is the overcapacity of different industries. Industries with overcapacity are oil, gas, automobile, and many others. Now, if companies in these industries expand their business in different countries, the global capital flow may rise over time. The low global capital flow is intentional, and after seven years of crisis, firms can create a positive impact on the global capital flows.
What actions do you think multinational firms can take to limit the impact of future crises in the global financial system on the ability of the enterprise to raise capital to pay its short-term bills and fund long-term investments?
Multinational corporations must expand their business to generate more revenue stream. Increasing capital investments may ensure both short- and long-term return for these corporations. Even in a crisis, the companies will be in a better position to fulfill both short- and long-term obligations. Business expansion is an appropriate action for these companies to increase their wealth and survive the financial crisis. Apart from it, expansion through subsidiaries is also a good option. For Instance, subsidiaries in global markets may create space for the company to utilize its revenue streams or financial reserves in the financial crisis effectively. If the financial crisis triggers the global economy, the firm can survive due to its financial worth.
