This research was conducted to address the different challenges brought about by financial crisis in the world and its implications to different sectors

This research was conducted to address the different challenges brought about by financial crisis in the world and its implications to different sectors. The research defines a financial crisis and gives answers to other questions that arise due to financial crisis. Contributions to the financial crisis in areas like Mexico and Asia are also addressed by this research.
Financial Crisis
A financial crisis is a situation in which there is an interference in the money circulation in the market. In this situation, the market is not able to supply adequate funds to investors. Mishkin defines a financial crisis as “A disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities.” In a financial crisis, some financial assets lose a large part of their nominal value.
Examples of a financial crisis include the bursting of other financial bubbles that occurred for the Bank of Canada in 2008, when a bank suffers a sudden rush of withdrawals by depositors and the global recession in the Sub-Prime Mortgage market in the United States in 2007.
Adverse Selection and Moral Hazards.
An Adverse Selection is a hindrance to the efficient functioning of a market that arises when one of the parties to a transaction has more information that the other.
A moral hazard is a situation in which one party decides on the risk to take while the other party bares the negative consequences of the risk choices made by the other party (Chossudovsky, 1999).
Adverse Selection and Moral Hazards are major contributors to a financial crisis as in Mexico and East Asia. In 1995, Mexico borrowed funds from the IMF (International Monetary Fund) to pay off investors and speculators (Chossudovsky, 1999). This made the total Mexican debt to shoot to fourteen times than the per-capita income of Mexican citizens, thus introducing a financial crisis. Not all of the blame goes to the IMF but the Mexican Policy action was the root of the problem. This was a Moral Hazard. (F.S Mishkin, 1998).
In East Asia, a financial crisis occurred in 1997 to 1998. It started with a financial liberalization in the early 1990s through lending booms with weak supervision and lack of expertise as well as banks accumulating loses while their net worth is declining. Due to this, uncertainty increased leading to a devaluation of the domestic currency in 1997. As a result, inflation increased. This explains the concept of Adverse Selection (Chossudovsky, 1999).
Irresponsible monetary and fiscal policies greatly contributed in the financial crisis of Mexico and East Asia. YES
Reason: the decision by Mexican government to borrow funds from the IMF for the sole purpose of paying creditors and speculators was a poor monetary action as it led to a massive increase in the debt of the country, which should be paid by its citizens. In East Asia, lending booms led to a decline in the net worth of banks thus leading to devaluation of the local currency. This was a poor monetary decision as it made the country to collapse economically.
IMF to help in a crisis instead of central bank
Central banks of nations tend to have the instruments that are used to limit unpredictability from a way out from some of the unconventional money policies that are helping the world’s economy start to recover after the unpleasant financial crisis that struck in the year 2008. However some of the reactions of markets still have to remain past the control threshold of central banks, and at times the exit could become rough (Chossudovsky, 1999)..
According to the IMF Policymakers, they say that in the nations which are using unconventional monetary policies are in a position to counter financial markets that are volatile that have clear communications on their exit plans. Therefore, the IMF can help smoothing their ways.
Lessons learnt
As the level of debt increases the loan requirements reach the lowest common denominator and the rising in housing prices reverse the course suddenly. It is rather important to see that the Federal Reserve is cautious not to raise rates too fast and contribute to an economic recession that is double-dipped. According to Kenneth Rogoff he did believe that there were issues either the status quo and therefore saw it fit to discuss some specific key points in regards to the reasons why the status quo could not necessarily be a valid stand point just to refer to a few, Rogoff stated that how much the innovations that were driven by technology that exist in the worldwide financial markets systems serve as engines for the growth as mass destruction agents depending on where one seed them. Some of the benefits that come to the international capital market are kind of overrated but rather come (Ivashina, ; Scharfstein, 2010).
IMF and international crisis
The IMF can handle international crisis as it has crisis firewalls that meet the increasing financial needs of the nations that are affected by global financial crisis and in doing so they help strengthen their global stability and also their economic and financial stability. Also the IMF steps us crisis lending by lending (Ivashina, ; Scharfstein, 2010) out frameworks that are suited to specific country needs and give greater emphasis to prevention of crisis and since the commencement of the INF it has been able to set $700 billion aside to help their member countries when crises arise. The IMF also is helping the word’s poorest nations by quadrupling their resources in the concessional lending. The IMF also sharpens its analysis and policy advice.
Rogoff’s solutions
Deep Pocket Lender of Last Resort: an institution that works the same way as the IMF and had the potential to lend and actually does the lending as a last resort lender. However, larger institutions like the IMF that are ready with funds that can be used to rescue may otherwise provide encouragement to risk greater through banks which is a moral hazard (Ivashina, ; Scharfstein, 2010).
International Financial Crisis Manager: Rogoff has believe that by having a crisis manager doesn’t necessarily have a motive for improvement within the institution but rather a way of deceiving what the International Monetary Fund and the G-7 can actually do now. The point that Rogoff’s journal is formed as a basis of discussion of various customs that can actually assist in the avoidance of these crises altogether instead of trying top subsequently manage a crisis. International Bankruptcy Court: the International bankruptcy courts are not empowered with the jurisdiction of entering into a country that is foreign and engage in activities such as seizing of the physical assets as if they might (Ivashina, ; Scharfstein, 2010) have access to doing in some other places. However it’s unfortunate, that they lack the power of enforcement in their debtor countries which currently is among the main issues that the international bankruptcy court is being faced with. If this court does not have any authoritative reigns, and lenders can therefore not use their national courts as crutches and due to that there could be a considerable decline in lending processes.


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