Table of Contents
Literature Review.. 3
Business Setting Application. 10
Introduction to Company. 10
Impacts of the Global Financial Crisis on Motorola. 10
Declining Pay. 10
Financial Figures. 11
First of all, the paper will discuss the events that led to the instant globalization of financial markets and the disruptions that it caused which then activated the worst ever financial crisis after the Great Depression of 1935. In the process, the paper will also shed light on the regulatory mechanisms of national governments that became an integral part in aggravating the whole episode(Lane & Milesi-Ferretti, 2008).Second of all, the paper will turn towards the lessons that the governments around the world learned from the devastation of the global economy forming the basis of their future plan of action in ensuring balanced approach towards the matter.Finally, the paper will present a conclusion summarising the past and future of the financial globalization by outlining the recommended strategies to save the world economy from such grave shocks in future.
The paper, Benefits and Risks of Financial Globalization: Challenges for Developing Countries, highlighted the significant improvements in the financial structure that persuaded many countries to globalise their financial institutions. Greater provision of funds, increased efficiency, more transparency in international accounting standards, improved corporate governance are just some of the convincing factors for institutions to globalize (Stulz, 1999). Also, diversified portfolios of foreign banks carry less risk bringing down the negative shocks to the home country; adopt best practices in every field enhancing the overall standard of the banking sector; possess power over the governments saving them from bail outs in times of solvency(Mishkin, 2001).
Another research presented various new factor that might be responsible for the financial globalization across the world. According to the research, the most responsible factors were the low capital cost and increase in its raising. Especially for developing countries and emerging economic of Latin America, East Asia and Eastern Europe that started to emerge due to financial liberalization. In 1991, Euro was introduced, playing a vital role in internalizing the developed economies when they started operating on a common medium of exchange. In just fifteen years, 28% and 47% of equities and debt securities of developing countries respectively were issues abroad from 1991-2005. The rate for developed countries in the same period was 8% and 35% respectively (Gozzi, Levine, & Schmukler, 2009).
Now to speak of financial innovation, new types of investment, newest introductions to the variety of investment vehicles and the rapid increase in less controlled types of managers of assets all have fuelled international commerce. The launching of the euro and the deregulation of the economic system of Europe has sown the seeds for further growth in international trade (Lane & Jay, Financial Exchange Rates and International Currency Exposures, 2010). Controlling synchronization and the liberty of institutional actions played a crucial role in the amalgamation of the European economies and financial systems while the common currency zone led to fleeting increase in international trade in capital and financial markets.
It is a question that whether commerce beyond the borders has played a part in the instigation of financial crisis across the globe. There are two possible, identifiable channels through which the creation of a single global financial market led to the financial situation which culminated in the financial crisis. First of all, the huge inflow of foreign investments stoked the ultra-accelerated advance in the market for asset-backed securities in the United States which was the beginning point of the economic anxiety back in 2007-2008. As Acharya and Bernanke reported, Banks based in Europe were key buyers of asset-pledged securities. Secondly, globalisation of financial markets allowed for hasty growth in the statements of financial position of several banks. All of this happened at two levels, regarding banks with global operations, the size and spread of these increased rapidly, making the policing of risk profiles very difficult for national controllers. Along with this, credit grew rapidly in several countries due to the local banks expanding by entering global markets of wholesale. Thirdly, the increasing part played by emerging economies in the world’s financial map also led to a mounting of weakness in credit markets. Particularly important is the fact that the result of demand for less risky debt assets and the multiplied options for equity in emerging market countries may have boosted the securitisation bang (see, amongst many others, Bernanke et al 2011).
When the financial crisis hit the global market, the effects were different for various economies across the globe; for some countries, it generated benefits while some countries had to suffer consequences for a longer than expected time period. It is also argued that the emerging economies and their financial activities and capital flows were one of the most vital shields against the financial upheaval (Gourinchas & Obstfeld, 2012).
Coming now to the public policy, the paper, Global financial crisis and emerging issues for public policy, examines its role in aggravating the financial crisis. These noteworthy features warrant an examination of the role of public policy in causing the crisis. First, there is a recognition that the global economic balances characterized by persistent high levels of current account surplus in some countries and current account deficits in the US provided a fertile ground for the crisis. Some analysts attribute global imbalances to the excessive dependence on a single reserve currency (the US dollar). Second, the rising inequalities in several countries could have resulted in a deficiency in the stability of aggregate consumer demand. Third, there was a prolonged period of loose monetary policies, which led to serious under pricing of risks, and possibly asset bubbles. Fourth, the central bankers were aware of the under pricing of risks but they believed in the self-connecting mechanism of market forces, and they also believed that in any case risks were truly dispersed due to financial innovation. Fifth, the public policy did not assign a priority to financial stability and the central banks were mandated to focus on prices stability. More, monetary policies were perhaps pro-cyclical. Hence, it is argued that there was either a failure of ideology and understanding or other political economy considerations that led to the crisis.
The international crisis has reminded us of the importance of a web of reforms at both global and country levels. Two vast categories exist for this – Implementation of reforms that decrease the chances as well as the harshness of future crises and policy changes that make macroeconomic and financial resistance better if a crisis does occur. At the international stage, the most important task is to maintain and improve the parameters of the international financial structure. The goal of reform is well-understood in this case, and includes that well-organized control and assessment of a multitude of global banks that support the entire international financial structure. At a simpler level, this would be encouraged by a more profound understanding base about the activities of these global banks at all levels which will definitely require much more thorough data about the undertakings of these banks and includes inclusion of offshore global financial bases into data about across-the-border financial undertakings (Lane & Milesi-Ferretti, 2008). In the same way, improved analytical replicas of global methodical risk are required to fruitfully interpret such a large amount of data and make suitable preventive measures (Gourinchas & Obstfeld, 2012). Another factor responsible for the global reforms is the making of resilient global security nets. Despite the recent rise in its means, the lending power of IMF has not risen quickly enough with the growth in international financial circumstances.
On the other hand, it is also vital that the factors and variable are kept in control that have the tendency to control the financial condition of the economy. Several economies, no matter if they operate on an independent currency take a good amount of foreign in their hands so that they can face the financial problems efficiently. It is also suggested that the fiscal policy, I if designed and maintained properly can bring the negative effects of financial shock down and can help manage the financial constraints to some extent (Reinhart & Rogoff, 2009).
Another way forward is presented in the paper, Global financial crisis and emerging issues for public policy. First, what is the right balance between the state and the market? That unfettered markets, especially in the financial sector, can cause havoc is now established. But it is not clear that empowering the state will necessarily be right since the crisis is a reflection of the failure of public policy also.Second, how to evaluate costs and benefits of the regulation of the financial sector, and in the process, how to redesign the domestic framework for regulation? It is evident that the costs of compliance with regulations incurred by market participants were exaggerated, and the benefits to the economic system and society at large of more active regulations seriously underestimated.
During 1929-33, the global depression had negatively affected many countries, industries, and individuals. The 2007 Global financial crisis has been stated as being worse than the global depression. The securities that were before considered to be highly secure for investment were not that safe. The credit crisis of 2008 had further caused the financial crisis to worsen. The global financial crisis had resulted in a threat of the collapse of major financial institutions such as banks, mortgage, and stock markets around the world. The ignition to the global financial crisis was the credit crisis. Due to the sudden decline in the interest rate, the Federal Bank increased the capital in the market. Since the investors wanted to earn interest, they found a new way to do so by investing in mortgage-backed securities (Jungmann & Sagemann, 2011).
The global financial crisis had played a huge role in the failure of many businesses. They had faced many consequences of the financial crisis. The increase in taxes and the loans taken up by the company had caused the company's stakeholders to make some logical moves; although these logical moves did not always contribute to the betterment of the company. The company that has been taken as a subject of study of this topic is Motorola.
Motorola is a very large market share holder in the mobile phones industry. Motorola is now owned by Google and is in its plans for increasing its business to further growth heights. The company has an innovate component to it thatdifferentiates it from its competitors. Its innovative procedures are going to lead it to its heights (Motorola, 2015). Motorola was an inventor of various mobile phone technologies including the first mobile phone and base station also. The company has been present for 80 years. It has a strong base and structure to the company(Motorola, 2015). This section will assess the factors that impacted such a strong firm about the global crisis.The impact was so significant that it was reported as a cause of the huge impacts in the financial figures of the company.
The Motorola 2008 annual report explicitly states that the global financial crisis could lead to a reduction of supplies or adversely, an increase in the prices of the supplies that could increase the final price of the product. It was also stated to impact the financial results(Motorola, 2008).
Increase in Risks
According to the annual report 2008, it is said that with the globalfinical crisis, the uncertainty of markets have increased. It is stated that it may create economic or political uncertainties(Motorola, 2008). Focusing on the political uncertainties and the understanding from the literature review, it can be gauged that when governments try to act to protect the economy from financial risks of interests, it may reduce their followership and they might become unpopular among the masses. This can be proved by the credit crisis in that the Federal Bank had declined the interest rates to near zero. This policy had affected investors adversely, and they started looking for other alternatives to invest their money. It was stated that Motorola could face difficulty n obtaining credit insurance. The credit insurance had mitigated the risk associated with the cash transactions before the financial crisis. However, Motorola was not going to get any insurance before the volatility of the financial markets is stagnated. Furthermore, it was stated that the pensioners and the retirement plans.
Decrease in Sales Order Compliance
It was stated that due to the effects of the global financial crisis on the banking system and financial institutions, there had been very significant effects on the credit markets. Since many companies rely on the bank loan and credit to invest in new opportunities, it was stated that Motorola's business has impacted in several ways. It was stated that there might be some orders cancelled due to the non-availability of credit, therefore, investment. Furthermore, the businesses that Motorola funded were stated to be potentially ceased until the crisis is resolved, or some other alternative to investment is discovered. Some other potential problems were also listed that included the impact on key suppliers. It is evident that the suppliers are also part of the economy, and the financial crisis would have impacted them as well. This would mean the pressure from the supplier side of operations also.
|Years Ended December 31||Percent Change|
|Dollars in millions||2008||2007||2006||2008-2007||2007-2006|
|Segment Net Sales||$12,009||$18,988||$28,383||-36%||-33%|
Source: (Motorola, 2008)
According to the annual report, it was statedthat these charges comprised of amortization of intangibles. The intangibles that can be amortized are the goodwill, value of the human capital's workers knowledge, and trademarks (Investopedia, 2015). Furthermore, a huge amount was spent on legal settlement of insurance. As mentioned before in the report that the insurance companies were not willing to insure the cash transactions(Motorola, 2008). It is said that insurance companies have a very complex liability structure. This complexity was the weak point of these companies in the financial crisis. Their liability structure comprises of non-financial liabilities and financial liabilities. The financial liabilities are the credit protection of companies. With the financial crisis, the insurance companies were pressured by mostly all of its customers to give them the insurance amount on this credit loss (Tower & Impavido, 2009). This is the reason the companies faced costs related to the insurance settlement. Another category of this charge is the reorganization of the business. The company had to reorganize the business to cope up with the financial crisis.
Source: (Motorola, 2008)
Furthermore, it can be seen from the current liability figure that it has raised. This liability was the main cause of the global financial crisis. The countries, companies and individuals, had suffered from the repayment of debts along with interest rates. Motorola faced the same consequence in the crisis. The figure for the current liabilities was $144 million in 2007. This figure increased like everything else and grew to $261 million. Furthermore, the change in the plan can also be seen. The return on plan assets were $20 million in 2007 and in 2008, it went into a loss of $73 million.
It is evident from the discussion that the financial globalization led to a disruption in the economic processes and the financial institutions around the world. The company, Motorola's sales deviation suggests that the financial globalization had had a huge impact. The factors identified in the annual reports of Motorola suggested that the credit market had frozen. The impact of the credit crisis was also the reason behind this. This credit unavailability meant that the suppliers of Motorola were affected. Manufacturing the raw parts required finances. The finance was done through credit and when the financial market destabilized, all the institutions that worked on credit were frozen in their operations as well. These institutions, in this case, were suppliers, consumers and the company. The consumers' operations decline could be shown through the sales decline of Motorola; although this company sells medium priced products. If a company that sells high-cost products would have been chosen, the sales decline would have been greater. An example could be the Apple laptops. In this case, it is analysedthat the product's sales would not decrease because they were purchased through credit. The decline would be because of the saving rate that increased during the financial crisis.
Source: (Lin, Edvinsson, Chen, & Beding, 2013)
The economies of Asia suffered along with the rest of the world. The real GDP declined to considerable lengths.
In the graph below, the inflation rates for the countries in East Asia can be seen.There was a sharp increase in inflation in 2008. However, the countries took appropriate measures to bring it down in 2009 to an extreme low.
Source: (Lin, Edvinsson, Chen, & Beding, 2013)
The book mentions that China took several steps for this recovery. In 2008, several private companies closed down. Imports declined by 25.4% since other countries in the world did not want to invest their money in the global financial schemes. The debt had governments to increase their tax rates and limit their spending. The limit in spending caused getting fewer imports from China. Also, the increased taxes on export products had also decreased the exports. For China, the import form these countries had declined by 21.8%; this factor also applies to China. In the midst of the financial crisis, the Chinese government had also decided to limit the spending to cover the debt losses.
The steps that China took to recover from this shock were firstly increasing the spending and investment in public infrastructure development. Secondly, China loosened its monetary policy to encourage lending by banks to avoid closing down of further private companies. They also took various measures such as a decrease in the imports to encourage domestic consumption and get out of the globalization of debt concept (Lin, Edvinsson, Chen, & Beding, 2013). It was statedthat spending on the public sector would be quite necessary to avoid such situations. This policy had ensured that the economies remain stagnant. China experienced a smaller change or decline in GDP when compared to Hog Kong, Singapore, and Taiwan. This is because the public expenditure policy was halfway through its implementation. Further working on its implementation made China the least effected countries in Asia.
The second proposition is to decline the interest rates in the economy. This decline could lead to a situation like the credit crisis. However, the implementation of the Chinese policy to give mortgage loans at a very low rate can be there to counter the threats of a credit crisis. The investment in the public departments would increase the government profits, and the tax rates would decline. This decline in the tax rates would mean that people have less expense. The inflation rates will go to zero with a fixed amount of money in the market. Right now, to pay interest rates, the central banks print more money thatincreases the supply of money in the economy. The basic economic principle of supply and demand suggests that the increase in supply leads to a decrease in price. This decrease in price or the value of money is the inflation.
The third, interrelated proposition is to pay all loans and interest rates on countries. This payment can be made by an increase in the real value of a country. Most economies pay interest rates and global borrowings by increasing tax rates and decreasing public spending. However, as can be seen by the Chinese example, they increased the spending on the public segments and encouraged the consumption of domestic produce to avoid importing on credit terms. The book stated that China had increased subsidies to companies to improve businesses. This business improve would lead to greater profits in the public sector reaping profits for the government enough to pay the global financial borrowings and interest.
This thorough analysis brought the conference paper to some propositions based on the Chinese model. The propositions included the investment in public systems to increase government profits. It wanted to use the profits as a source of loan payment rather than taking more loans to pay off the existing loans. The model included the reduction of taxes in the economy to bring the inflation rates and the money supply to zero.
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