Understanding Financial Crises and Global Capital Flows! By Seomul Evans At Isnare.com Ezine Articles

During the recent economic downturn that paralyzed business, financial institutions, both national and international emerged as saviors. Though the imminent scare seemed to have ebbed, there are enough warning signs to worry about a sequel of the monster.

What one needs to understand from this particular situation is the need to differentiate between short term and long term capital inflows. Whereas short-term capital inflows can be lucrative, they can also be terribly unstable and dangerous. They cause the most damage. They are totally based on assumptions, which are not exactly the right way to go about things especially in matters of finance. Naturally, when things go wrong it goes wrong big time and you can have everything folding up before you even know it. The hot money is just gravy and can be used as just a support to drive the deals, but shouldn’t be projected as the top priority.

When the bubble bursts everybody points fingers at everybody. If you analyze things it is quite evident who or rather what is to blame. The lax attitude of the governments over the organizations that show almost no transparency; their attitude of going out of the way to protect them, choosing favorites, the companies, which do not adhere to any corporate governance form. These are the main reasons when any financial bubble bursts.

The financial institutions too can do better. Most of them are politically aligned and they have their own in house troubles. If they are busy fighting their own demons then how would they help in solving the problem of financial crises is anybody’s guess. The international financial institutions should understand that the countries who come to them for money are not nuisance causing pests. It is this very attitude that throws the economy of the smaller nations into a toss. When you treat a person who comes for help as just a borrower and a constant disturbance then how would you think of rehabilitating that person?

Instead, if the international financial institutions think of them as clients then there would bring a sea change in their growth. All that needs to change is the attitude and nothing more. The good news is that this is already happening and that deems good for the future.

There are market oriented and interventionist solutions to the financial crisis problems. They are not quick fix and cannot be used in isolation. There has to be a combination of both of them to solve the problems. One of these solutions involves getting the domestic and international financial institutions into the fray and in order to solve the financial problems.

There are two converging views and ideas of market oriented and interventionist solutions. The market-oriented one is called the free markets, which broadly gets the financial institutions national and international beneath its umbrella and tries to solve problems. While the latter, the interventionist method thinks of free markets itself as the problem. Completely two different view points.

The approach of these two has their advantages and they should be judiciously used at a time of crisis. The lax approach of the governments around the world when the financial bubble burst was bared naked. It is also true that all the people involved were clueless about what was happening around them.

It is quite clear from the whole episode that there are no shortcuts or quick fixes. There are no magic wands that wish away the crises in the financial markets. Relaxed attitude when dealing with financial markets is something that brings the downfall. Instead, everyone involved should try all the options that are available and do not stop until there is a clear solution in sight.

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