Changes in Financial Markets and it impact on Recent Financial Crisis

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Introduction

For a period of three consecutive decades, the world has witnessed numerous changes in the financial market, which has further disintegrated into global financial crises. The situation grew even worse in the past five years from the year 2007, leading to the global economic recession in 2008 (Goonatilake & Herath 2007).

Globally, people witnessed falling of stock markets and collapsing of commercial businesses dealing with finance and governments, even the richest ones shivered. Developing countries largely blamed the wealthiest countries for their engagement in risky financial businesses with research revealing that these countries had committed themselves to financial business markets targeting huge profits (Malkiel 2003).

Changes in financial market have consequently affected the economic growth, thus distressing the governments efforts in dealing with the continued employment crises in developed countries and down turning the economic growth in developing countries (Krishnamurthy 2010). Due to the above reason, this study seeks to examine the reasons behind the changes in financial markets during the last 30 years and the role of these changes in the recent financial crisis.

Overview of Financial Market

Financial market describes the commercial economic centres where people or companies can trade on stocks or shares, commodities, bills of exchange, foreign exchange and financial securities, which work as financial business units for capital or credit (Dick 2009). Financial markets aim at acquiring funds from shareholders and incorporating them into corporations.

Typically, financial markets come in different forms such as capital markets, stock markets, money markets, insurance markets, commodity markets, foreign exchange markets, and future markets. Each type of markets deals with different forms of financial engagements. According to Nier (2009), financial market is largely responsible for controlling financial lending and borrowing activities, which provide room for lenders and borrowers to interact through financial deals.

These markets are renowned for their responsibility in regulating the economical situations of nearly every country through enhancing investment, saving funds mobilisation, industrial development, entrepreneurship, and national growth. Conventionally, financial markets are responsible for regulating funds throughout nations and the entire globe.

Financial markets across the globe have been shaking for over three decades with its prime impact felt in the last five years (2007-2012) throughout the globe, but the climax was in 2008. Down turning in the financial market consequently led to world financial meltdowns or financial crises with people coming to acknowledge important financial terms such as inflation.

According to research by (Krishnamurthy 2010), each country in the world underwent this experience ranging from wealthiest to poorest. For instance, there were cases such as the US stock market crash, savings and loan collapse, and credit crunch in the early 1990s, 1994 Mexican peso devaluation, the Asian financial crises in 1997, and the Russian Long Term Capital Management implosion in 1998 (Lee 2012, p.41).

The financial crunch was also eminent in developing countries within Africa, Latin America, and some countries in the Middle East, which faced this financial misfortune. However, lessons were unlearnt from these crises until the year 2006 to 2009, when the US and other renowned economic influential countries in the world triggered a global financial crisis.

Changes in Financial Market

The world financial centres at this moment witnessed numerous changes in the financial market. According to Lee (2012), involvement of superior countries in financial crises in the last three decades shook the world with subsequent changes ranging from financial engagements to technological bumbling.

Research carried out during this moment identified changes in equity prices in global markets, deprecation and fluctuations in the value of main currencies, increased financial crisis, changes in commodity prices, volatility in exchanges rates, changes in the taxation system in the US, changes in lending processes, and increased liquidity in financial markets (United Nation 2012).

Both developed and developing countries significantly contributed to changes in the financial markets. In developed countries, the contribution was mainly through various unconventional policy measures that led to inflation and liquidity. On the other hand, persistent and high unemployment in developing countries is responsible for causing crushes in wage growth, consumer demands, and increasing delinquency on mortgages.

Changes in lending policies

Changes in lending policies, as characterised by credibility of fiscal policies, are the definite changes that took place during the error of global financial crisis.

During the three consecutive decades, international banks governing the global finances and central banks controlling financial regulations and lending entered into world records for engaging in poor management practices (Ocaya 2012). At this moment, the international bank lending systems adjusted their policies and increased lending to emerging and developing economies started. This move served as a malicious deal for the interest of the banks to manipulate profit margins.

Ocaya (2012) asserts, Reckless loans extended by financial institutions without proper adherence to the code of lending, ability to pay, guarantees and profitability considerations(p.167). The poor lending system led to easy access of funds by unstable and non-realistic businesses and companies that consequently operated in loses, allowed over-accumulation of bad debts left to banks, and engaged malpractices including retrenchment programmes.

Volatility in exchanges rates

During the practicing of credibility, the international exchange rates remained significantly low. In major developed economies, exchanges rates went down due to the high demand of lending practice as endorsed by the international banks and central banks.

Exchange rate instability consequently led to large fluctuations among major international reserve currencies responsible for major economic boost, including the Euro, Japanese Yen, and the United States dollar (United Nations 2012). Among these currencies and the great sterling pound which traded fairly by then, are the world international reserve currencies commonly used in international trading.

The United Nations (2012) further points out, Fluctuations in the value of the United States dollar and unpredictable trends in financial derivatives trading in commodity markets (p.15). Instability of the exchange rates especially the major currency, that is, the dollar led to poor exchange rates and fluctuations in other currencies that increasingly resulted in economic stagnation that further affected the social and political menaces.

Instability in commodity prices

As defined in the meaning of financial market, commodity markets are key elements of financial market, including trading in physical products like food products and precious materials. Shooting of prices in these primary products was worse between the years 2008 and currently in the year 2012.

Krishnamurthy (2010), states that during this period, prices of essential commodities including oil continuously went up. This aspect thus reduced the consumption rate of such products and in turn reduced the financial expectation of the world financial markets through reduced international trading.

In his study, Ocaya (2012) affirms, The export earnings have been hit hard due to reduced demand and lower prices for resources and other commodities (p.172). Private business tycoons and other business intermediaries with alternative sources of financing, excellent stability of spending positions, and international investments became advantageous of the prevailing situation and exploited the commodity market, thus worsening the financial market crisis.

Change in the stock market

Changes in the stock market exhibited changes in the financial market. A stock market is an important component in the financial market deals with stocks trading, also commonly known as share, and derivatives at agreeable prices and terms. The stock market relates relatively well with the Gross Domestic Product (GDP) in developed economies over time.

GDP simply means the official market value of services or goods produced in the country in a given duration. According to Duca (2007), during this moment when the global financial crisis stood at its peak, stock markets experienced rapidly falling prices in the market. Therefore, at a certain moment, the stock prices are quite important as they determine the GDP of a given country.

Duca (2007) posits, During such moments in the U.S. stock price movements cause movements in GDP (p.6). The same situation happened in the UK, where the lending stock, commonly known as the FTSE 100, caused a similar trend in the stock market, thus hampering the sustainability of the stock market.

Impact of the changes on financial crisis (in developed countries)

Changes in the financial market consequently influenced the events that unfold within a financial crisis moment. Given the above changes in the financial market, one can quickly conclude that these changes heavily influenced the financial instability worldwide.

Beginning with the developed economies, which suffered the greatest blow, changes in the financial market triggered the several financial problems. Krishnamurthy (2012) asserts that due to poor lending strategies commonly described as credibility, the national financial system suffered from liquidity characterised by excess accumulation of bad debts, broadened gap between the rich and the poor, turn down in consumer profits, and commercial profits that led to layoffs and bankruptcies.

Ocaya (2012) asserts, The crisis played a significant role in the failure of key businesses, declines in consumer wealth, and a downturn in economic activity leading to the current global recession and contributing to the European (p.168). This scenario sent a huge blow to the entire economical system in the developed economies, especially in the United States, the United Kingdom, and Japan, among other commercialised countries.

Changes in the financial market in this period have continuously proved dangerous to the later. During this moment, customers involved in the money and stock markets retreated due to fear of losses that were eminent during that period (Helleiner & Pagliari 2010).

From that moment of financial crisis, very few people can afford to invest in financial markets due to the fears of running at losses or even due to bankruptcy after securing employment in non-viable businesses that depended on loans from lending institutions and later shut down due to bankruptcy.

Due to fear and unemployment that resulted from global collapse of financial market, the world social and financial order strained, causing the global financial disorder. Miles (2002) asserts that several companies and Business Corporation could no longer support themselves financially and thus they operated in large debts. The international banks and central banks tried to recover from the financial crisis by developing financial policies that further result in poverty, economical instabilities, and increased financial crises.

In a bid to restore the economical situation, governments in developed economies like the United States came up with policies and strategies to stabilise the financial condition.

According to Ocaya (2012), some of these measures included the attempt of American International Group (AIG) and other major American banks including the Bank of America to rescue the situation through bailouts and government policies including strained lending. These bailouts aimed at providing financial support to individuals as well as businesses and other corporations.

In contrary, instead of improving the financial crisis, they made it even worse because they kept the government into risks of incurring deficits. According to Duca (2007), the situation gave room for exploiters in the private sector to increase the housing rates in a bid to improve their business portfolios. Characterised by high employment rates and fiscal austerity measures among citizens in the United States, the population is at risk of maintaining the national economic recession.

Impact of the changes on financial crisis (in developing countries)

In the context of developing countries, including the worst poverty-stricken sub-Saharan Africa, impacts of the financial market changes were eminent.

Given the fact that the financial institutions of these emerging economies are generally tiny and centralised within basic centres with interest in the banking system, the financial crisis was unavoidable (Zaki Bah & Rao 2012). Developing economies and the Sub-Saharan Africa largely depend on the economies of the developed countries and thus the financial crisis impact projected into these countries.

Ocaya (2012) claims, Many economies of Sub-Sahara Africa have witnessed depressed commodity prices, reduced external transfers and remittances, declined donor aid and tourism as well as declined investment and consumption, which has resulted in the overall contraction of GDP growth(p.169). This aspect further constrained the government finances as the situation forced the governments to increase funding to its projects and programmes due to reduced financial revenues obtained through taxes.

Developing nations largely depend on funds in the form of foreign exchange, donations, or import duties. Changes in the financial markets consequently led to financial instabilities within these nations. Tourism, being the backbone of many developing countries, especially in Africa, suffered a serious blow.

Commercial businesses supported by international donors in developing countries faced a challenge. According to the United Nations (2012), since the beginning of the global financial crisis, the tourism turnover reduced due to the crisis since tourists could no longer afford their leisure expenses during holidays. People in developed countries could no longer offer loans with an aim of cutting down their operational costs.

Another shortfall of the changes in the financial markets included reduced foreign investments and strained financial support from international donors and well-wishers. The existing and new investments initiated by foreigners slowed down due to lack of adequate support. This element, in turn, forced the governments to strain in their budgets to accommodate the accomplishment of such projects that remained underdeveloped.

Among the changes practised in the financial markets included changes in the stock markets. Despite the fact that the stock markets propel economies of many nations, the stock markets in developed countries suffered and thus the situation worsened in developing countries, including Africa. The majority of developing countries have unreliable and underdeveloped stock markets, which were unable to survive the crises, and the majority of them collapsed, hitting the economical belt.

Inflations in the international reserve currencies and increased prices in essential commodities influenced the financial crisis in these countries. Due to what happened in these nations because of changes in the financial market, government expenditures increased in a bid to accommodate the situation. Research reveals that some countries in developing economies had to incur huge losses that affected the social, economical, and even political establishments.

Conclusion

Changes in the global financial market initiated by developed economies, including the United States, the United Kingdom, and other European countries triggered numerous financial tensions. Changes in the financial markets within the last three decades involved changes in the lending/loaning policies, changes in the stock markets, as well as changes in the commodity prices resulted in a subsequent financial crisis (United Nations 2012).

Globally, the developed economies were the first to encounter this menace with superior financial countries, including the United States facing economical challenges. Illegitimate businesses bloomed exponentially through loans granted under low rates; regrettably, these businesses later failed to pay back the leaving the government to incur losses. The stock markets suffered a downturn and since they influence the Gross Domestic Product (GDP), financial institutions underwent a huge financial crisis.

The developing nations were not exclusion since the trade between them and their fellow developed counterpart was constrained. According to the United Nations (2012), the tourism industry that provides a wide range of financial assistance to such countries felt the blow since most tourists come from the developed nations and could no longer support their holiday trips as banks in the European countries strained financial access to these people in order to recover from the crisis.

Despite facing such crises in the global financial markets, several governments are still engaging in malpractices. Therefore, there is likelihood that the financial market will continue shaking if governments do not change their financial practices in the financial market.

References

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Goonatilake, R. & Herath, S. 2007, The volatility of the stock Market and News, International research journal of finance and economics, no.11, pp.53-64. Web.

Helleiner, E. & Pagliari, S. 2010, Global Finance in Crisis: The Politics of International Regulatory Change, Taylor & Francis, New York.

Krishnamurthy A., 2010, How Debt Markets Have Malfunctioned in the Crisis, Journal of Economic Perspectives, vol. 24 no.1, pp.3-28. Web.

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United Nations 2012, World Economic Situation and Prospects 2012-2013: Global economic outlook. Web.

Zaki, E., Bah, R. & Rao, A. 2012, Analysis of Financial Crisis in UAE Financial Markets, International Research Journal of Finance and Economics, no. 83, pp.121-133. Web.

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