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The current state of globalization has raised a strong dispute among economists, on whether the financial crises are inevitable. In this paper, the term globalization of financial markets is interpreted as the incorporation of a country’s internal economic structure with global financial systems and institutions. This incorporation normally calls for the authorities to liberalize the regional financial sector and the prime account (IMFStaff, 2008). In the last three decades, globalization of financial markets has resulted to financial crises. Globalization has long been influenced by new technological development and liberalization of local financial institutions.
The Inevitability of Financial Crises
Despite that, the effects of globalization on financial crises are not felt uniformly among nations and to some extent not felt at all in others; it is debatably an inevitable process which may no end soon (Gilman, 2010, p. 416). He reveals that quickly developing technology enables electronic commerce and funds transfer on an international scale and nations have no option rather than following the trend.
Financial crises may rise due to limitation in global financial markets. The defect in financial markets can cause tentative attacks, crashes and so on. This leads to crises in all countries despite their sound decision making procedures. Moreover, when a nation liberalizes its economic system it gives the right to the domestic and local investors to exercise market discipline. Financial crises can also be due to some external factors, still in nations with sound basics and even in the lack of deficiency in global money markets. When a nation relies on foreign capital country becomes dependent on foreign capital, rapid changes in foreign capital surge may lead to financial complexities and economic recession. According to Calvo, Leiderman, and Reinhart (1996) the external factors are imperative determining factors of capital rate of flow to developing nations.
In principle, globalization illustrates a globe that is permanently unified to an extent that proceedings in a single region of the globe are felt in all other parts. According to Gilley, globalization has enabled different people and societies to have the right to the similar expertise, and information than what they had before. This shows that all nations are competing with each other and hence, the effects of financial crises are irreversible.
Globalization of financial markets allows more people and societies to get pleasure from better living standards as it improves the economy of a country. It is proven hard eliminate any nation or state from the effects financial crises. All nations developed and under developed are striving to be integrated within the global society (Harvey, 2010, p. 256).
What governments can do to reduce the likelihood of financial crises?
According to the IMF report there are four areas that the governments need to address to prevent more financial crises. They include; the perimeter of regulation, procyclicality, information gaps, harmonizing global regulatory procedures with legal frame works and provision of liquidity to markets. The perimeter of regulation requires to be enlarged to cover all the institutions and markets that are beyond the detection by supervisors. Most of these institutions are capable of using debt to purchase assets to an extent of threatening financial stability (IMFSurveyonline, 2009). To evade overload of valuable markets and financial institutions it is vital to recognize cautiously the definite faults which broader regulation might strive to solve.
Monetary cycles are to be anticipated, however, several institutional regulations can emphasize cyclical movements. These regulations may include; capital regulations and compensation exercises in various monetary sectors (Jochen Andritzky, 2009, p. 2). Incentives ought to be brought in to persuade financial institutions to build up supplementary capital buffers through upturns and reduce them through downturns. Several ways can be implemented to achieve this, for example, a nation can make funds necessities countercyclical; thus, this leads to rise in the sum of capital necessary to maintain a specified level of resources would increase through booms and decrease through busts. Preferably, this regulation helps in stabilization during upturns and down turns.
The governments should ensure that all the relevant information is communicated to the concerned financial institutions. Clear and consistent information would ensure better judgment of the impending risks to the investors. Serious examination of dealing with financial crises calls for the provision of information. Most likely, the required information on the financial crisis is crucial to the market and other financial institutions. Also, the governments should work on harmonizing global regulatory procedures; this will help in dealing with inconsistencies in the current financial institutions both locally and globally (IMF, 2010, p. 6).
Finally, the governments need to focus on regulating liquidity in the market. The governments through the Central banks’ of specific nations should use their capabilities in regulating interest rates to govern the globalised financial markets. Central banks should determine the market in which they can influence in order to maximize the returns. They need to take into consideration how the rates reflect on the end users. The provision of emergency liquidity should be controlled and the authorities need to ensure discontinuation as markets normalize. The timing should also be controlled to prevent rapid transfer of liquidity and credit (Perotti, 2011).
It is evident that the financial crises are inevitable with the globalization of the financial market. The integration of financial systems for different countries means that, when one nation suffers financial crises the others also suffer either directly or indirectly. Nations need to devise measures to protect the negative effects of globalization. The unsealed regulatory setting puts it tricky to weigh the future trend of the global market and thus, financial crises don’t seem to end soon. Thus, the governments should strive to present consistency in the regulations in order to restore and maintain urgently desired certainty in the financial markets.
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