National Economics University

..........0o0..........

Critical Thinking in Business

Topic: Critical viewpoint on global financial system
Hanoi, 2023

Subject: Critical Thinking in

Business
Lecturer: Professor Soren Kirchner
Class: EBBA 13.3
Team members:

Nguyễn Khánh Sơn (Leader) 11219124

Huỳnh Bá Hoàn 11212324
Đỗ Ngọc Huy 11219061
Phan Tiến Đăng Khoa 11219069
Nguyễn Việt Hiếu 11219058
Nguyễn Thanh Vân 11219151

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 Table of contents

Contents...............................................................................................2
The history of global financial system..........................................2
The domination of the US Dollars..................................................4
Global financial system......................................................................5
Before the 2008 crisis.....................................................................5
During the 2008 crisis.....................................................................6
After the 2008 crisis.........................................................................8
During Covid 19..............................................................................11
After Covid 19..................................................................................13
At the moment.................................................................................15
Compare Western and Eastern financial system....................20
Conclusion.........................................................................................22
Reference list.....................................................................................23

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Contents

The history of global financial system

The global financial system is the worldwide framework of legal agreements, institutions, and
both formal and informal economic actors that together facilitate international flows of
financial capital for purposes of investment and trade financing. Since emerging in the late
19th century during the first modern wave of economic globalization, its evolution is marked
by the establishment of central banks, multilateral treaties, and intergovernmental
organizations aimed at improving the transparency, regulation, and effectiveness of
international markets. In the late 1800s, world migration and communication technology
facilitated unprecedented growth in international trade and investment. At the onset of World
War I, trade contracted as foreign exchange markets became paralyzed by money market
illiquidity. Countries sought to defend against external shocks with protectionist policies and
trade virtually halted by 1933, worsening the effects of the global Great Depression until a
series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the
international monetary system after World War II improved exchange rate stability, fostering
record growth in global finance.
A series of currency devaluations and oil crises in the 1970s led most countries to float their
currencies. The world economy became increasingly financially integrated in the 1980s and
1990s due to capital account liberalization and financial deregulation. A series of financial
crises in Europe, Asia, and Latin America followed with contagious effects due to greater
exposure to volatile capital flows. The global financial crisis, which originated in the United
States in 2007, quickly propagated among other nations and is recognized as the catalyst for
the worldwide Great Recession. A market adjustment to Greece's noncompliance with its
monetary union in 2009 ignited a sovereign debt crisis among European nations known as the
Eurozone crisis. The history of international finance shows a U-shaped pattern in
international capital flows: high prior to 1914 and after 1989, but lower in between. The
volatility of capital flows has been greater since the 1970s than in previous periods.
A country's decision to operate an open economy and globalize its financial capital carries
monetary implications captured by the balance of payments. It also renders exposure to risks
in international finance, such as political deterioration, regulatory changes, foreign exchange
controls, and legal uncertainties for property rights and investments. Both individuals and
groups may participate in the global financial system. Consumers and international
businesses undertake consumption, production, and investment. Governments and
intergovernmental bodies act as purveyors of international trade, economic development, and
crisis management. Regulatory bodies establish financial regulations and legal procedures,
while independent bodies facilitate industry supervision. Research institutes and other
associations analyze data, publish reports and policy briefs, and host public discourse on
global financial affairs.
While the global financial system is edging toward greater stability, governments must deal
with differing regional or national needs. Some nations are trying to systematically
discontinue unconventional monetary policies installed to cultivate recovery, while others are
expanding their scope and scale. Emerging market policymakers face a challenge of precision

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as they must carefully institute sustainable macroeconomic policies during extraordinary
market sensitivity without provoking investors to retreat their capital to stronger markets.
Nations' inability to align interests and achieve international consensus on matters such as
banking regulation has perpetuated the risk of future global financial catastrophes. Initiatives
like the United Nations Sustainable Development Goal 10 are aimed at improving regulation
and monitoring of global financial systems.

The domination of the US Dollars

The dominance of the dollar can be explained by the historical length of time, not only
now, but long ago, the dollar has been the world's reserve currency. Here's the history of the
dollar and why it's so valuable today:
From 1821 to 1914, most of the world's currency was converted to gold. As a result, the
global economy is connected through the common use of the gold and money exchange
mechanism
World War I in the period 1915-1925 collapsed the gold standard system. While most of
the world stopped converting currencies to gold, the US continued to pursue this mechanism
for a few more years, this has helped elevate the USD's status as an international reserve
currency - the US dollar seem to be more stable and reliable in the eyes of foreign
governments and central bank, so that they can hold US dollars as a store of value without
worrying about rapid devaluation or inflation. During the period between World War I and
World War II (1919 - 1944) the United States replaced Britain as the dominant financial
power of the world (Kumar 2014)
The dominance of the USD as the world's primary reserve currency has its roots in the
aftermath of World War II. In 1944, a new international monetary system was established.
The Bretton Woods Agreement established the USD as the world's primary reserve currency
and tied its value to gold at a fixed rate of $35 per ounce. Other currencies were then pegged
to the USD at fixed exchange rates.
Under the Bretton Woods system, the USD was in high demand as countries around the
world needed USD to settle international transactions and to hold as reserve assets. The US
also became a major creditor nation, lending money to other countries to help rebuild after
the war. However, the Bretton Woods system began to unravel in the 1960s as the US
experienced inflation and a growing trade deficit, which put pressure on the fixed exchange
rate system and the dollar dominance. In 1971, US President Richard Nixon announced that
the US would no longer convert USD into gold, effectively ending the Bretton Woods system
and paving the way for the USD to float freely in the global currency markets. Moreover, to
protect the dollar's position, the US was forced to look for a better backed up tool. At this
point, oil is the only thing that satisfies the necessary criteria to be selected as a unit, so in the
1970s US negotiated a deal with Saudi Arabia to use the US dollar as the primary currency
for oil transactions. This agreement was known as the petrodollar system and it helped to
maintain the dominance of the US dollar as a global reserve currency. Other countries that
wanted to buy oil had to purchase US dollars first, which increased the demand for the
currency and helped to prop up its value.
Therefore, the dominance of the USD (United States Dollar) is due to several factors.
First, The size of the US economy is the primary reason behind the USD's prevalence. The

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US economy is the largest in the world, which gives the USD a significant advantage in
international trade and finance. In addition, the stability of the US economy makes it a
reliable currency for international transactions, particularly when compared to other major
economies. Moreover, the political and military power of the US strengthens the position of
the USD as a dominant global currency. The US Federal Reserve's responsibility for
managing the US monetary policy also plays a crucial role in determining the value of the
USD. The Federal Reserve's ability to maintain price stability and promote economic growth
is widely respected, further enhancing the position of the USD. Lastly, the historical legacy
of the USD as the dominant global currency for several decades has created a network effect,
where the more people use the USD, the more valuable it becomes. Overall, these factors
have contributed to the USD's dominance in the global economy.

Global financial system

Before the 2008 crisis

The global financial system is an intricate network of financial institutions, markets, and
instruments that facilitate the flow of capital across borders. This system has evolved over
time, with various events shaping its structure and function. This part will explore some
prominent economic events before 2008 and examine the signs that preceded the 2008
financial crisis, as well as analyze the Big Short movie about the 2008 financial crisis.
Prominent economic events before 2008
The global economy has experienced a number of significant crises throughout history.
One of the most severe downturns was the Great Depression, which lasted from 1929 until
the late 1930s. The depression began with the stock market crash of 1929 and was
characterized by high levels of unemployment, bank failures, and a sharp decline in economic
activity. The Great Depression had far-reaching effects on the world economy, leading to the
development of Keynesian economics and the creation of international financial institutions
like the IMF and the World Bank.
In the late 1990s, the dotcom bubble was a period of speculation in internet-related
stocks. Investors poured money into technology companies with little regard for their
earnings or business models, causing stock prices to soar. However, the bubble burst in 2000,
leading to a sharp decline in stock prices and the failure of many dotcom companies.
The Latin American debt crisis of 1982 was another significant economic crisis. Latin
American countries had borrowed heavily, but a combination of high oil prices, a decline in
commodity prices, and high interest rates in developed countries made it impossible for them
to repay their debts. This led to widespread default and restructuring of debt, with the IMF
playing a key role in managing the crisis. ( Auty, R.M , 1994 )
Finally, the Asian financial crisis of 1997-1998 was a period of economic turmoil that
began in Thailand and spread to other countries in the region, including Indonesia, Malaysia,
and South Korea. The crisis was triggered by a combination of high debt levels, currency
speculation, and weak financial systems. The crisis led to widespread currency devaluations,
bankruptcies, and social unrest. These crises demonstrate the interconnectedness of the global
economy and the importance of sound economic policies and financial regulations. ( Team,
T.I., 2023 )
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 Signs of the 2008 financial crisis
The 2008 financial crisis was one of the most severe economic downturns in modern
history, affecting the global economy. Prior to the crisis, there were several warning signs
that pointed towards an impending disaster. One such sign was the subprime mortgage
lending, where banks and other financial institutions were lending money to high-risk
borrowers who did not meet the usual credit standards. These borrowers often had poor credit
histories or low income, and when many of them began to default on their loans, it led to a
collapse in the housing market and financial institutions that held these mortgages.
Another warning sign was the housing market bubble, where housing prices increased
significantly, leading many people to buy homes they could not afford, with the expectation
that the value of their homes would continue to rise. However, this led to an oversupply of
homes and a collapse in housing prices when the bubble burst. Several banks and other
financial institutions began to fail, leading to a loss of confidence in the financial system.
This was due in part to the exposure of these institutions to subprime mortgages and other
high-risk investments. The stock market also experienced a sharp decline in 2008, with the
Dow Jones Industrial Average dropping nearly 40% in just a few months. This was due to a
loss of confidence in the financial system and concerns about the overall health of the
economy. ( Chen, J. 2022 )
The U.S. government and other governments around the world took significant steps to
intervene in the financial system and prevent a complete collapse. This included bailouts of
several major banks and other financial institutions. The signs of the 2008 financial crisis
were a combination of risky lending practices, an overheated housing market, and a loss of
confidence in the financial system. These factors led to a global economic downturn that
lasted for several years, affecting millions of people worldwide.

During the 2008 crisis

The world financial system has been dominated by the US dollar for decades, with the US
economy serving as the main driver of global economic growth. However, this dominance
was evident through the 2008 global financial crisis, which exposed the vulnerabilities and
weaknesses of the global financial system. This crisis was caused by a combination of
factors, including the growth of the subprime mortgage market, the creation of complex
financial instruments such as mortgage-backed securities, mortgage debt service, as well as a
lack of effective regulation and supervision by governments and financial institutions.
The introduction of property mortgages to borrow money was a major factor leading to
the 2008 financial crisis. A mortgage is a loan secured by a portion of real estate, usually a
house or a piece of land. Borrowers use the property as collateral for the loan, meaning that if
they are unable to repay the loan, the lender can foreclose the property and sell it to recover
their money.
People use good mortgages with high credit ratings to buy properties like homes. Good
mortgages typically have low interest rates and favorable repayment terms, and are only
offered to borrowers with high credit scores and a history of responsible debt. These
mortgages are considered low-risk investments by banks, as borrowers are considered
unlikely to default on their loans.

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 However, banks began to securitize these mortgages, pooling a large number of
individual mortgages into complex financial products known as mortgage-backed securities
(MBS).The reason for this securitization is that the bank will avoid holding costly capital
reserve, by essentially turning them into underwriters that still originate loans, but then sell
them off to others (Acharya & Richardson, 2009). These securities are then sold to
investors around the world, often with high ratings from credit rating agencies and
commissions paid by banks.
Demand for this type of MBS is starting to increase day by day and banks are starting to
accept subprime mortgages - a type of mortgage for borrowers with low credit scores or little
or no income verification - to create more secured mortgage-backed securities while the
borrower is unable to repay the loan. These subprime mortgages are offered to borrowers
with poor credit history or high debt-to-income ratios and are typically issued at an adjustable
rate, which means a borrower's monthly payments can increase dramatically over time,
making it difficult or impossible for them to repay the loan. Worse still, these subprime
mortgages are often lumped together into complex financial products like MBS. These MBS
were sold to investors around the world who believed they were investing in a low risk, high
return investment. However, many of these MBS contain a large number of subprime
mortgages, which are much riskier than traditional mortgages. So, to spread the risk of MBS
harboring these bad mortgages, banks created collateralized debt obligations (CDOs), pooling
a large number of poor quality mortgages and companies and other financial instruments into
a single package. As a result, CDOs are rated much higher by credit rating agencies than they
deserve.
The use of credit default swaps (CDSs) also contributed to the crisis. CDS are financial
instruments that act as insurance policies against the default of a bond or other financial
instrument. They are often used to hedge against losses in investments in MBS and CDOs.
However, the use of CDS is largely unregulated and, in some cases, investors have even
purchased CDS on securities they do not own. As subprime mortgage borrowers defaulted on
their loans, a wave of collapses swept through the housing market, leading to a decline in the
value of CDOs, MBSs, and legal compensation for CDS. Many banks and financial
institutions had invested heavily in these securities (MBS, CDO) , and when their value
declined, the institutions that held them suffered massive losses. Many of these institutions
were forced to write off billions of dollars in losses, leading to their failure.
When banks and financial institutions began to fail, it triggered a wave of panic in the
financial markets. Banks and other financial institutions had been heavily reliant on short-
term funding to finance their operations, and when this funding dried up, they were unable to
meet their obligations. The result was a credit freeze that spread throughout the financial
system, making it difficult for businesses and individuals to access credit. New lending
declined substantially during the financial crisis across all types of loans. (Ivashina &
Scharfstein, 2010)
The failure of the US financial system had a significant impact on the global financial
system. The US was the largest economy in the world, and many banks and financial
institutions around the world had invested heavily in US securities. When the US financial
system began to fail, it had a ripple effect that spread throughout the global financial system.
In addition to the credit freeze, the collapse of the US financial system led to a decline in

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stock markets around the world. Many investors had invested heavily in US securities, and
the decline in their value led to a decline in the value of stock markets around the world. This
decline in stock markets had a negative impact on consumer confidence and led to a decline
in consumer spending.
The collapse of the US financial system also led to a disruption of global trade. The
decline in consumer spending led to a decline in demand for goods and services, which led to
a decline in global trade. This decline in trade had a negative impact on the economies of
many countries, particularly those that were heavily reliant on exports.
In response to the crisis, governments around the world enacted policies to stabilize their
financial systems. In the US, the government enacted the Troubled Asset Relief Program
(TARP), which provided funding to banks and other financial institutions to help them
weather the crisis. The Federal Reserve also implemented a number of measures to increase
liquidity in the financial system, including lowering interest rates and implementing
quantitative easing. In addition to government action, there was also a push for increased
regulation of the financial system. The Dodd-Frank Wall Street Reform and Consumer
Protection Act was enacted in 2010 in response to the crisis. This legislation included a
number of provisions designed to increase transparency in the financial system, regulate
derivatives trading, and provide greater protections for consumers.
The 2008 financial crisis had a profound impact on the global economy and led to
significant changes in the financial system. The crisis highlighted the risks associated with
the securitization of mortgages and the need for increased regulation and transparency in the
financial system. While many lessons were learned from the crisis, the global economy
remains vulnerable to future financial shocks, and it is important for governments and
financial institutions to remain vigilant to prevent a repeat of the 2008 crisis.

After the 2008 crisis

Consequences
Many who took out subprime mortgages eventually defaulted. When they could not pay,
financial institutions took major hits. The government, however, stepped in to bail out banks.
The housing market was deeply impacted by the crisis. Evictions and foreclosures began
within months. The stock market, in response, began to plummet and major businesses
worldwide began to fail, losing millions. This, of course, resulted in widespread layoffs and
extended periods of unemployment worldwide. Declining credit availability and failing
confidence in financial stability led to fewer and more cautious investments, and international
trade slowed to a crawl. ( Loo, A. (2023) )
Possible long-term consequences
In addition to these well-established consequences on economic trends, the crisis may
have left long-lasting damage. For instance, several economies have seen a greater decrease
in fertility rates, which will have an adverse effect on those nations' future labor force sizes.
Another result of the crisis was a drop in advanced nations' net migration rates (immigration
minus emigration).

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 However, it appears that income disparity has grown, particularly in areas where output
and employment losses following the crisis were significant. In some situations, the post-
crisis growth in inequality only served to amplify pre-existing patterns, which frustrated
traditional political parties and fueled protectionist attitudes.
Policy responses
The failure of Lehman Brothers 11 years ago this very month was a critical juncture for
the world economy. The ensuing panic and contagion across a wide range of financial
markets was worsened by a broad loss of confidence in many types of financial institutions.
Credit markets froze and liquidity dried up in critical segments of global financial markets.
Without a timely and forceful policy response, we were looking down an economic precipice
not seen since the Great Depression. Fortunately, that response came in unprecedented scale,
scope and speed. (Carstens, 2019)
In order to ensure that certain sectors of the debt and securities markets were operating as
intended, central banks cut policy rates and provided liquidity to bolster interbank markets. In
doing so, central banks fulfilled their historical duty as lenders of last resort. There was a
need for new forms of interventions on a larger scale than in the past because of the size and
complexity of contemporary financial systems, especially given their reliance on market-
based funding. As a result, central bank balance sheets increased significantly from historical

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norms. (Graph 1).

Central banks have learned a lot over the past decade about potential new ways of
implementing monetary policy. The use of unconventional monetary policy tools was largely
born out of necessity: partly to address disruptions in monetary policy transmission and partly
to provide additional monetary stimulus once policy rates were constrained by the effective
lower bound. Broadly speaking, these unconventional monetary policy tools can be divided
into four types of measures: lending operations, asset purchase programmes, forward
guidance and negative interest rate policies.
Lending operations were used early in the crisis to support market functioning. To make
sure that liquidity was available to everyone who needed it, central banks expanded both the
types of assets they accepted as eligible collateral for loans and the set of counterparties they
lent to.
Asset purchase programmes played an important role in central banks’ interventions.
They aimed mainly to ease broad financial conditions by supporting asset valuations. The
interventions covered a wide range of market segments, depending on the nature of disruption
and the importance of the relevant asset class for monetary transmission. Most prominent
were purchases of government bonds aimed at lowering long-term yields, although many
programmes also focused on private securities.
Central banks also used forward guidance to clarify their intentions regarding future
policy settings and to communicate their commitment to pursue their mandates. Promising to
keep rates at a certain level was crucial at times of heightened uncertainty about the economic
outlook. Forward guidance also helped bring different unconventional monetary policy tools
together into an overall package, making policymakers’ strategic intentions clearer.
Finally, negative interest rate policies were implemented by a number of central banks
to overcome the zero lower bound on interest rates. Reducing policy rates below zero can
stimulate the economy by supporting credit and demand as long as they transmit to market
rates. And that has also meant that, over time, such low rates can depress banks’ net interest
margins and their ability to build up capital – the foundation for sustainable lending. Low
bank valuations reflect this profitability challenge (Graph 3).

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 Containing financial vulnerabilities: Countries with more rapid credit growth and larger
excess current account deficits in the years running up to the crisis found these constraints
binding them more tightly when financial conditions tightened after the crisis. Moreover,
stricter curbs on certain aspects of bank activity in the precrisis years (for example,
restrictions on banks’ ability to underwrite and deal in securities) lowered the probability of a
banking crisis in 2007–08.
Buffers and frameworks: The evidence suggests that countries with stronger precrisis
fiscal positions experienced smaller output losses in the aftermath. Our analysis also finds
that greater exchange rate flexibility helped lessen output damages.
Policies after the crisis: Several countries took unprecedented and exceptional policy
actions to support their economies after the 2008 financial meltdown. These actions—
specifically, quasi-fiscal measures to support the financial sector, including bank guarantees
and capital injections—helped temper postcrisis output losses. ( Chen, W., Mrkaic, M. and
Nabar, M. (2018)

During Covid 19
Affect on business:
The lockdown period radically changed the way consumers behave around the world and
determined them to prefer online shops (Pinzaru, Zbuchea, & Anghel, 2020). E-commerce
continues to grow and companies involved in the supply chain have to find new ways to
adapt to the demand. A new mechanism to support the supply chain will appear soon due to
technological developments. On the other hand, an increase in the poverty rate is estimated
for 29 European countries, from 4.9% to 9.4%, and an average loss rate for low income
workers between 10% and 16.2% (Palomino, Rodríguez, & Sebastian, 2020). At the same
time, we must keep in mind that the slowdown in the production process and the adoption of
precautionary behaviour by consumers will have a significant impact on industries in general.

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It is assumed that there will be a greater increase in both poverty and social inequality in
Eastern and Southern Europe compared to Northern and Central Europe (Palomino et al.,
2020). This differentiation is accentuated by the rise in prevention measures. This pandemic
determined an impact on the world economy similar to a critical banking crisis that initiates
uncertainty, increases poverty, and freezes most of the business. In general, banking crises
are associated with short, but significant declines in economic growth and prosperity. It is
crucial to note that there is an important and significant decline in economic growth in the
year after a banking crisis and the negative impact on the economy is a long-term one, so that
past banking crises also leave serious economic repercussions in the present (Kenny &
Turner, 2020).
Furthermore, Europe faces an existential challenge. As an echo of Jean Monnet's
prophecy that Europe will be tested in crisis, the COVID-19 crisis raised the perception of
urgency (Camous & Claeys, 2020). Resources are rare, especially in the medical system, and
states often make difficult decisions about their healthcare system. It is a period of sacrifice
for all industries, from the economic to the religious ones (Barnett, 2020). Reconstructing
global markets in a post-pandemic world cannot be based on old formulas, but instead will
require a different reality of markets. Therefore, a major implication is to focus on the
elements that are now booming and the long-term changes that have been brought about by
globalization and are now being strengthened by the pandemic. Countries have had a
different approach to the pandemic and many industries have been affected, including
restaurants, hotels, or universities. This led to an economic decline. The stability of the
banking sector is, therefore, crucial in the context of the crisis affecting these sectors
mentioned before and adding cultural, leisure, and recreational activities, or tourist offices.
The banking sector is one of the important pillars of the economy, because it provides
services that impact the daily lives of consumers. The feeling of financial stability and
security brought by banks is important for individuals and families. A solid financial sector
encourages savings and allocates them to investments that support economic growth. It’s a
difficult period that has implications not only economically but also mentally. One of the
most important changes brought by the COVID-19 pandemic is that now the work offer is
higher than the demand. Still, businesses “have to handle this situation with care, consider the
troubled social climate, and tensed psychological ones”. In this period of crisis, banks play an
important role in helping the community to cope with the pandemic through the support for
state, small and large businesses, and individuals. To contribute to the resilience of
companies, individuals, and other organizations, the banks need to adapt to the challenges
brought by the COVID-19 pandemic accordingly. How effective a Bank-supported economic
recovery will be, however, depends on banks’ resilience and financial health.” Losses from
loan defaults and increases in risk-weighted assets will deplete banks’ capital .
At the same time, unemployment is increasing as a result of an economic crisis, especially
among young people if we compare this category with other age groups. In the short term, in
countries with strong labor protection legislation, the impact may decrease, but in the
medium term, the problem is accentuated .At the macroeconomic level, the labor market is
under pressure. Figures may depend also on the methodology of registration used. For
instance, the infrastructure in Romania is the weakest in the EU and the underground
economy is highly developed (it is estimated by the European Commission at 32% of GDP,

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the highest level in the EU). Starting with 2021, there was a change in methodologies (in line
with European regulations) that led to an increase in the unemployment rate. People who
produce agricultural goods are no longer part of the employed population, which has led to a
decrease in the active population and thus to an increase in the unemployment rate (BCR
Research, 2021). Expanding our research, COVID-19 and the social and economic shock
have already profoundly transformed organizational cultures in all companies. Symbols that
previously represented normality such as open spaces full of people, full elevators and people
in suits have been replaced with screens, online meetings, and personal protective equipment
(masks, gloves). Meetings and conversations have shifted to virtual spaces (such as Zoom,
Skype, Teams) and the values of many companies have changed during this period from
exploration and creativity to safety and resilience. These changes directly impact managers
because they wonder if an organizational culture can be created in a work from a home-based
company. Under these extreme conditions, strategic management and behavioral strategy
have become essential because a decision-making style that incorporates lessons in the field
of psychology provides a vision anchored in the reality we live in. The vision of the emerging
behavioral strategy offers a unique perspective on decision-making. If the authorities and
decision makers do not have a well-founded strategy -because they do not fully understand
how the disease is spreading and the epidemiological parameters- companies are forced to
adapt to an environment where uncertainty is the only constant. During this period, several
supply chains were directly affected and so we faced a crisis of products related to better
coping with the pandemic, such as masks, disinfectants, cleaning supplies, and care products,
etc. These issues were pointed out by Alao and Gbolagade (2020) as well, who discuss how
the interruptions due to a coronavirus outbreak impact the management and strategy of
companies. Organizations must use resilience as a base to adapt to the crisis and businesses
must act today in five major areas: “recovering revenue, redefining operations, rethinking
organizations, accelerating digitalization, and adapting marketing strategies' '. In this context,
managers have an essential role in mitigating the effects of this crisis.

After Covid 19
Impact of Covid-19 on Global Financial System:
In March of 2020, international markets seized up with a violence unequaled since the
Global Financial Crisis (GFC) nearly a dozen years before. As economies around the world
locked down in the face of the potentially deadly but completely novel SARS-CoV-2 virus,
stock markets fell, firms and governments scrambled for cash, liquidity strains emerged even
in the market for US Treasurys, and capital flows to emerging-market and developing
economies (EMDEs) reversed violently. Once again, the world economy appeared on the
brink of collapse—until it was pulled back by monetary and fiscal interventions that
outstripped even those of the 2008-09 GFC. ( Obstfeld, M. (2022)
Policy responses to support the financial system during and after the COVID-19
pandemic.
Governments and central banks around the world have implemented various policy
responses to support the financial system during and after the COVID-19 pandemic. Some of
the most common policy responses include:

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 Fiscal stimulus: Governments have implemented various fiscal stimulus measures such
as direct payments to individuals, expanded unemployment benefits, and business loans and
grants to support the economy.
Monetary policy: Central banks have implemented various monetary policy measures
such as lowering interest rates, providing liquidity to banks, and purchasing government
bonds and other assets to support financial markets.
Regulatory forbearance: Some governments have eased or temporarily suspended
certain regulations to allow financial institutions to better cope with the economic fallout of
the pandemic.
Debt relief: Some governments have implemented debt relief measures for individuals,
businesses, and countries struggling to repay their debts due to the pandemic.
Overall, these policy responses aim to support the financial system and the broader
economy during and after the COVID-19 pandemic.
Trends of Post-Covid-19 financial system.
The growing focus on partnerships
The COVID-19 emergency has highlighted the ever-growing importance of partnerships
across the financial ecosystem. Partnerships between financial institutions and technology
firms have accelerated access to funding and expanded access to products to previously
underserved populations. And while the crisis continues to produce many success stories,
more work is needed to fully realize the potential of partnership models across the ecosystem.
This includes partnerships between industry and the public sector.
The evolution of fintech
The fintech ecosystem, which had been flourishing over the past 10 years following the
2008 global financial crisis, has undergone a severe shake-up since first lockdowns were
imposed globally. It is too early to assess how the policy measures put in place in response to
the pandemic have reshaped the fintech ecosystem but certain trends are emerging: payment
companies, for example, seem to be benefiting from the rapid adoption of digital payments
while digital banks have come under pressure. The industry overall could witness a trend
towards “re-bundling”. Meanwhile, fintech has also advanced into the public sector arena and
is being leveraged to develop public financial infrastructures that enhance, for example, the
provision of social services.
The need for a global digital ID
The previous essay on the role of fintech in the delivery of public services alluded to the
importance of building strong digital ID frameworks. Current systems of data and identity are
disconnected, incoherent and opaque. What is required is a system that is interoperable,
apolitical, distributed and explainable, and that grants individuals greater control over their
information.
Accelerated trends and altered directions in digital payments
The pandemic has caused an unprecedented shift in digital payments. The shock has
accelerated trends but also appears to have altered their direction. Shifts like the massive
acceptance of contactless payments in such countries as the United States, the United
Kingdom or Australia are more than a temporary trend – they are here to stay. And the
digitization of payments is not only providing benefits to consumers, it also presents immense

[14]
opportunities for micro, small and medium enterprises, many of which are being hit
particularly hard during the crisis.
Quantitative easing and inflating asset prices
Despite economic fundamentals deteriorating rapidly over the spring and summer of
2020, asset prices powered ahead and the US NASDAQ stock index set a series of new
records well into August. As policy-makers could not afford a financial crisis on top of a
health crisis, there seemed to be an almost implicit guarantee of support should asset prices
fall. And while quantitative easing has come a long way and an increasing number of central
banks are purchasing assets on an unprecedented scale, asset values have become distorted.
Market-derived pricing signals of the underlying health of the economy are being diluted and
policy-makers must focus on redesigning tools that are again fit for purpose.
The transformation of regulatory capabilities and approaches
Following the global financial crisis, the COVID-19 pandemic marks the profound
challenge to stakeholders across the financial system in just over a decade. The pandemic has
hit markets and the economy as a black-swan event, originating from outside the financial
system. The potential long-term implications for the industry and for regulators are only now
emerging. What is clear already is that regulators must deepen cooperation and continue to
focus on technology as both a tool to facilitate regulatory compliance and as a challenge that
requires the strengthening of cyber- and data-security standards. The COVID-19 situation
also highlighted once more the importance of limiting procyclicality in the financial system,
and presents an opportunity to review remaining sources of cyclicality in regulation.
Implications for the financial services workforce
Technology solutions have played a crucial role in facilitating business continuity
throughout the crisis and have contributed to minimizing potential disruptions. Employees
across the financial sector have leveraged remote-work technologies and institutions have
accelerated the roll-out of digital projects to deliver services with minimal human
intervention. At the same time, the reliance on technology also raises challenges, particularly
with regard to cybersecurity. These challenges must be addressed urgently as remote-work
arrangements will likely only partially reverse after the crisis.

At the moment
Global financial system at the moment
Financial stability risks have risen in the face of the highest inflation in decades and the
ongoing spillover effects of Russia's war in Ukraine on European and global energy markets.
Amid poor market liquidity, there is a risk that a sudden, disorderly tightening in financial
conditions of central banks may interact with pre existing vulnerabilities. Rising rates, shaky
economic fundamentals, and significant capital flight have increased borrowing costs in
emerging markets, especially for frontier economies, increasing the likelihood of further
defaults. The housing downturn in China has gotten worse as a result of the severe drops in
home sales, which have increased the pressure on developers and increased the possibility of
financial sector spillovers. ( Global Financial Stability Report (2022) IMF
US dollar situation at the moment

[15]
 Nearly every asset class has seen miserable returns in 2022, except for the United States
dollar. The dollar has strengthened dramatically over the course of the year as the Federal
Reserve hiked interest rates in an effort to quash sky-high inflation. (Tepper, T. (2023). The
U.S. Dollar Index, which measures the greenback against a basket of other currencies, is up
more than 17% so far this year. We have witnessed a tremendous rise in the dollar. After
gaining significant strength, the dollar reached parity with the euro, Europe’s common
currency in July 2022 . It marked the first time since 2002 that the dollar reached such a level
of relative strength. While most of the attention is on the relationship between the dollar and
euro, it’s notable that the dollar also gained against other major currencies, such as Japan’s
yen, the British pound and the Canadian dollar. It's in the middle of every securities
transaction and payment around the globe. The dollar’s strength is even more pronounced
when compared to the poor performance of stocks, bonds, real estate and cryptocurrencies—
and that’s before considering the impact of inflation. The U.S. dollar is strengthening because
the Fed adopted a hawkish monetary policy stance in response to skyrocketing inflation. It
has lifted the federal funds rate from near zero at the beginning of 2022 to a range of 3.75%
to 4% at the November FOMC meeting. Market observers expect at least another percentage
point increase by the end of the year. But the strong dollar isn’t just about the Fed. While the
U.S. economy may be flirting with a recession, it’s still looking much better than other
advanced economies, including the United Kingdom, European nations and Japan. European
economies are bearing the brunt of Russia’s war on Ukraine, especially in the form of
dramatically higher energy costs. Japan is struggling with lower global demand for
manufactured goods, which make up the better part of its exports. Meanwhile, the sheer
tonnage of geopolitical risks swamping the global economy, not least of which are China’s
economic troubles thanks to its zero Covid policy and bursting real estate bubble, have driven
investors to safe-haven investments. And the greenback is currently one of the safest bets
around. In the last two months of 2022, the dollar lost ground against the euro – a trend that
continues in early 2023.
However, there are still potential risks for the US dollar. FX swaps, forwards and
currency swaps create forward dollar payment obligations that do not appear on balance
sheets and are missing in standard debt statistics. Non-banks outside the United States owe as
much as $25 trillion in such missing debt, up from $17 trillion in 2016. Non-US banks owe
upwards of $35 trillion. Much of this debt is very short-term and the resulting rollover needs
make for dollar funding squeezes. Policy responses to such squeezes include central bank
swap lines that are set in a fog, with little information about the geographic distribution of the
missing debt. Embedded in the foreign exchange (FX) market is huge, unseen dollar
borrowing. In an FX swap, for instance, a Dutch pension fund or Japanese insurer borrows
dollars and lends euro or yen in the "spot leg", and later repays the dollars and receives euro
or yen in the "forward leg". Thus, an FX swap, along with its close cousin, a currency swap,
resembles a repurchase agreement, or repo, with a currency rather than a security as
"collateral". Unlike repo, the payment obligations from these instruments are recorded off-
balance sheet, in a blind spot. The $80 trillion-plus in outstanding obligations to pay US
dollars in FX swaps/forwards and currency swaps, mostly very short-term, exceeds the stocks
of dollar Treasury bills, repo and commercial paper combined. The churn of deals
approached $5 trillion per day in April 2022, two thirds of daily global FX turnover. FX swap

[16]
markets are vulnerable to funding squeezes. This was evident during the Great Financial
Crisis (GFC) and again in March 2020 when the Covid-19 pandemic wrought havoc. For all
the differences between 2008 and 2020, swaps emerged in both episodes as flash points, with
dollar borrowers forced to pay high rates if they could borrow at all. To restore market
functioning, central bank swap lines funneled dollars to non-US banks offshore, which on-
lent to those scrambling for dollars. The missing dollar debt from FX swaps/forwards and
currency swaps is huge, adding to the vulnerabilities created by on-balance sheet dollar debts
of non-US borrowers. It has reached $26 trillion for non-banks outside the United States,
double their on-balance sheet debt. Moreover, it has grown smartly since 2016, despite the
often significant premium demanded on dollar swap funding (Borio et al (2016). For banks
headquartered outside the United States, dollar debt from these instruments is estimated at
$39 trillion, more than double their on-balance sheet dollar debt and more than 10 times their
capital.
Viewpoint from investors, corporates, consumers
On global financial system at the moment
Following the global financial crisis, investors became accustomed to low volatility.
Amid risks stemming from high external borrowing costs, stubbornly high inflation, volatile
commodity markets, heightened uncertainty about the global economic outlook, and
pressures from policy tightening , investors have aggressively pulled back from risk-taking in
September. Investors have continued to differentiate across emerging market economies so
far, and many of the largest emerging markets seem to be more resilient to external
vulnerabilities. Investors may further reassess the outlook if inflationary pressures do not
abate as quickly as currently anticipated or the economic slowdown intensifies. At the
moment, investors became increasingly concerned about rising recession risks. In the euro
area, with the European Central Bank (ECB) starting to normalize policy, concerns about
fragmentation risk have resurfaced, as investors have focused on fiscal vulnerabilities in
some member states. In China, investors withdrew about $75 billion from local currency
bonds between February and August 2022, including nearly 15 percent of foreign holdings of
government bonds, but still a small share of the overall bond market. The compression of
yield differentials, largely due to diverging monetary policy, has likely been the primary
driver of outflows from China, although the rise of benchmark-driven investors may also be
playing a supporting role.
On US dollar situation at the moment
Some investors could find the dollar to be a safe haven during times of market volatility
but not everyone will benefit from the current dollar situation. (Hayes, A. (2022) For U.S.
companies conducting business abroad, including many in the S&P 500 Index, a stronger
dollar dents the value of their foreign profits when translated back into dollars. As a result,
their investors will likely see a negative impact. Whereas, for multinational companies that
do a lot of business in the U.S, their net income earned will increase once exchanged from
dollars to their currency. Investors in these companies will of course benefit. At the same
time, American companies’ global competitiveness is at risk, as products become pricier in
local-currency terms which can lead to lower sales as foreign buyers shift to lower cost
alternatives. These factors may be felt more sharply in coming months as global demand is
likely to slow, but they do not seem priced into 2022 or 2023 earnings estimates.

[17]
 U.S. financial assets may become less attractive to foreign investors. For one, a stronger
dollar drives up the local-currency costs of U.S. financial assets, which could weaken new
flows into U.S. stocks and bonds. What’s more, foreign investors may face growing pressure
to repatriate their U.S.-based holdings to reap currency-related gains, especially as local
opportunities become available, potentially further pressuring demand for U.S. financial
assets. The same is not true, however, for U.S. investors who include overseas-based
investments in their portfolios.
Americans holding U.S. dollars can see those dollars go further abroad, affording them a
greater degree of buying power overseas. Because local prices in foreign countries are not
influenced greatly by changes in the U.S. economy, a strong dollar can buy more goods when
converted to the local currency. Expatriates, or U.S. citizens living and working overseas,
will also see their cost of living decrease if they still own dollars or receive dollars as income.
Furthermore, goods produced abroad and imported to the United States will be cheaper if the
manufacturer's currency falls in value compared to the dollar. As the dollar continues to
strengthen, the price of imports will continue to fall. Other lower-cost imports will also fall in
price, leaving more disposable income in the pockets of American consumers. U.S.
companies that import raw materials from abroad will have a lower total cost of production
and enjoy larger profit margins as a result. Whereas for foreign consumers, they will find the
prices of goods and services in America more expensive with a stronger dollar. Business
travelers and foreigners living in the US but holding on to foreign-denominated bank
accounts, or who are paid incomes in their home currency, will be hurt and their cost of living
increased. Thus, export from the US will be more expensive when transferred to foreign
currencies. As the dollar continues to strengthen, the price of exports from the US will
continue to fall. Other lower-cost exports will also rise in price, making it harder for foreign
consumers. Companies that import raw materials from the US will have a higher total cost of
production and as a result their profit margin will be lower
Viewpoint from countries
On global financial system at the moment
The international bond markets and banking systems should be able to provide sufficient
funding for the high-growth "catch-up" phase of sustainable development, but this is not the
case. (Sachs, J.D. (2021). International bond markets and banks continue to give developing
nations a meager, pricey, and unstable amount of money. Borrowers from developing nations
typically incur annual interest costs that are 5–10% higher than those of wealthy nations.
Borrowers from developing nations are seen as having a high risk of default. The bond rating
agencies automatically assign poorer countries lower ratings simply because of their
economic hardship. Yet these perceived high risks are mostly exaggerated.
When a government issues bonds to fund public investments, it typically assumes that it
will be able to refinance some or all of the bonds as they come due, given that the long-term
trajectory of its debt in relation to government revenues is acceptable. The government will
most likely be forced into default if it finds itself suddenly unable to refinance the debts that
are coming due – not because of bad faith or long-term insolvency, but rather due to a lack of
available cash. This is what happens to far too many governments in developing-country
countries. International lenders (or rating agencies) start to think, frequently for arbitrary
reasons, that a particular country has lost its creditworthiness. This perception results in a

[18]
“sudden stop” of new lending to the government. The government typically seeks emergency
funding from the IMF at that point. It typically takes years or even decades to restore the
government's reputation in the international financial community. Whereas, rich-country
governments that borrow internationally in their own currencies do not face the same risk of a
sudden stop because their own central banks act as lenders of last resort. The Federal
Reserve's ability to purchase Treasury bonds on the open market ensures that the government
can roll over debts that are about to become due, which is one of the main reasons lending to
the US government is regarded as safe. The same holds true for nations that are a part of the
eurozone, provided that the European Central Bank serves as the lender of last resort. In the
immediate aftermath of the 2008 financial crisis, when the ECB temporarily failed to fulfill
that role, several eurozone nations (including Greece, Ireland, and Portugal) briefly lost
access to global capital markets. Following the eurozone's experience of being on the verge
of collapse, the ECB increased its role as lender of last resort, engaged in quantitative easing
through large-scale purchases of eurozone bonds, and lowered borrowing costs for the
affected nations. (Sachs, J.D. (2021)
Thus, wealthy nations typically borrow in their own currencies at reasonable rates with
little risk of illiquidity, with the exception of rare instances of exceptional policy
mismanagement (such as by the US government in 2008 and the ECB shortly after). Low-and
lower-middle-income countries, by contrast, borrow in foreign currencies (mainly dollars and
euros), pay exceptionally high interest rates, and suffer sudden stops. For example, Ghana’s
debt-to-GDP ratio (83.5%) is far lower than Greece’s (206.7%) or Portugal’s (130.8%), yet
Moody’s rates the creditworthiness of Ghana’s government bonds at B3, several notches
below those of Greece (Ba3) and Portugal (Baa2). Ghana pays around 9% on ten-year
borrowing, whereas Greece and Portugal pay just 1.3% and 0.4%, respectively. The major
credit-rating agencies (Fitch, Moody’s, and S&P Global) assign investment-grade ratings to
most rich countries and to many upper-middle-income countries, but assign sub-investment-
grade ratings to nearly all lower-middle-income countries and to all low-income countries.
For instance, only the Philippines and Indonesia, two lower-middle-income nations, are
currently given an investment grade by Moody's.
By law, regulation, or internal policy, trillions of dollars in pension, insurance, bank, and
other investment funds are diverted away from sub-investment-grade securities. Without the
support of a significant central bank, it is very difficult for a government to regain an
investment-grade sovereign rating once it has been lost. Twenty nations' credit ratings were
lowered to below investment grade in the 2010s, including Barbados, Brazil, Greece, Tunisia,
and Turkey. Four of the five countries that have since regained investment-grade status—
Hungary, Ireland, Portugal, and Slovenia—are members of the European Union; neither one
of the other three—Latin America, Africa, or Asia—nor the fifth, Russia, are from these
regions.
On US dollar situation at the moment
The Federal Reserve’s determination to crush inflation at home by raising interest rates is
inflicting profound pain in other countries — pushing up prices, ballooning the size of debt
payments and increasing the risk of a deep recession. (Cohen, P. (2022) Those interest rate
increases are pumping up the value of the dollar — the go-to currency for much of the
world’s trade and transactions — and causing economic turmoil in both rich and poor

[19]
nations. In Britain and across much of the European continent, the dollar’s acceleration is
helping feed stinging inflation. On Monday, the British pound touched a record low against
the dollar as investors balked at a government tax cut and spending plan. And China, which
tightly controls its currency, fixed the renminbi at its lowest level in two years while taking
steps to manage its decline. In Nigeria and Somalia, where the risk of starvation already
lurks, the strong dollar is pushing up the price of imported food, fuel and medicine. The
strong dollar is nudging debt-ridden Argentina, Egypt and Kenya closer to default and
threatening to discourage foreign investment in emerging markets like India and South
Korea. The most vulnerable face the biggest blowback. Poor countries often have no choice
but to repay loans in dollars, no matter what the exchange rate was when they first borrowed
the money. Spiraling U.S. interest rates were what set off the catastrophic debt crisis in Latin
America in the 1980s. The situation is particularly fraught because so many countries ran up
above-average debts to deal with the fallout from the pandemic. And now they are facing
renewed pressure to offer public support as food and energy prices soar. In Indonesia this
month, thousands of protesters, angry over a 30 percent price increase on subsidized fuel,
clashed with the police. In Tunisia, a shortage of subsidized food items like sugar, coffee,
flour and eggs has shuttered cafes and emptied market shelves. Brazil has cut fuel taxes and
increased social welfare payments, but soaring prices remain a daily struggle. Then there is a
pile-on effect. Even in countries where inflation is not as high, central banks feel pressure to
raise interest rates to bolster their currencies and prevent import prices from skyrocketing.
Last week, Argentina, the Philippines, Brazil, Indonesia, South Africa, the United Arab
Emirates, Sweden, Switzerland, Saudi Arabia, Britain and Norway raised interest rates.
Despite the pain a strong dollar is causing, most economists say that the global outcome
would be worse if the Fed failed to halt inflation in the United States. (Cohen, P. (2022)

Compare Western and Eastern financial system

Differences
China’s financial and banking system has, in many respects, features that are unlike those
of its Western counterparts. First, the economic and ideological model of the socialist market
economy in China basically renders the market a tool of the State, as opposed to a goal per se,
to which the State must achieve. In this context, market infrastructures and mechanisms are
used mainly as a means of gathering information, and for regulating the economy in
accordance with the overall state directives. Financial and “market liberalization is extended,
as long as it does not infringe on the [Communist] Party’s monopoly of power.”China’s
financial system and its primary agents (banks) are predominantly state-owned, and are
tasked with numerous fiscal and developmental missions.
Second, the way China’s financial policies and regulations are made and implemented is
significantly different from that of the Western developed economies (the US, for example).
The country’s economic and financial policies (be they fiscal or monetary ones) are
controlled, if not decided, by the Politburo (especially its Standing Committee) and Central
Committee of the Communist Party, or more precisely, by special interest groups within the
Party leadership. Specifically, the Party’s authority over the financial system is exercised
mainly through the Central Organization Department (which has the power to appoint the
leadership of all major institutions), and through the Central Finance and Economy Leading

[20]
Small Group. These two organizations, then, directly or indirectly exert influence on the State
Council, in which the financial regulatory agencies are instituted. Unlike in the case of most
Western central bank governors and certain financial regulators, in which these officials’
discretion and authority is exercised almost independently, the power of financial
policymakers in China is nonetheless subject to the Party leadership’s political will. It is not
surprising, though, that certain seasoned technocrats (such as Zhou Xiaochuan, who has been
in charge of the country’s central bank for more than a decade), are actually very powerful
and enjoy a significant degree of freedom to exercise their discretion. (Tsang, C. ( 2016)
Third, unlike in developed Western economies (the U.S. in particular), China’s financial
system remains a bank-dominated one, where capital markets (e.g. bond markets) are still
underdeveloped. This status quo has been transforming gradually since China began to
liberalize its interest rates, as evident by the rapid expansion of the country’s shadow banking
sector.
Similarities
On the other hand, despite the foregoing distinctive features, China’s financial system is
not very different from those of Western developed economies, particularly if we compare
them in the context of historical evolution. At least two noteworthy points emerge here. First,
the relationship between the banks and the government is very intertwined in both cases. And
the sheer power of the largest banks in China shows a picture that is a surprising parallel of
the powerful Western banks. For example, like China in its extensive use of policy banks to
facilitate fiscal and developmental financing, U.S. national banks in the 1800’s (such as the
Second Bank of the United States) also served as the fiscal agent and depository of the
federal government. Even today, there is the surprising coincidence that the five largest banks
in China and the U.S., both control about 45% of the total bank assets in their respective
countries. (Tsang, C. ( 2016)
Second, the way market actors respond to financial repression (e.g. interest rates control),
government guarantees and credit regulation are similar in both cases, and both subject the
wider economy to instability risk. For instance, it was the initially overly-repressed and then
gradually-liberalized interest rates on the deposit accounts that gave rise to the rapid growth
of China’s shadow banking sector such as wealth management products and trust products.
Similarly, it was the ceiling imposed on deposit interest rates by Regulation Q that
encouraged the emergence of alternatives to bank deposits, such as Money Market Fund (the
U.S.-version of shadow banking). It was also the relaxation of the restrictions on deposit
rates, as a result of financial deregulation in the 1980’s, which contributed to the U.S. savings
and loan crisis. We do not know, yet, whether China’s interest rate and financial
liberalization will have negative consequences similar to those of the U.S. liberalization, but
we are certain that a similar kind of financial-market dynamics is at work in China and the
U.S. It is only a matter of time before China arrives at the same stage of financial
development as that of the developed Western economies.

[21]
Conclusion
Prediction of global financial system
Global growth is projected to fall from an estimated 3.4 percent in 2022 to 2.9 percent
in 2023. The forecast for 2023 is 0.2 percentage point higher than predicted in the October
2022 World Economic Outlook but below the historical average of 3.8 percent. The rise in
central bank rates to fight inflation and Russia’s war in Ukraine continue to weigh on
economic activity. The rapid spread of COVID-19 in China dampened growth in 2022, but
the recent reopening has paved the way for a faster-than-expected recovery. Global inflation
is expected to fall from 8.8 percent in 2022 to 6.6 percent in 2023 and 4.3 percent in 2024,
still above pre-pandemic (2017–19) levels of about 3.5 percent. The balance of risks remains
tilted to the downside, but adverse risks have moderated since the October 2022 WEO. On
the upside, a stronger boost from pent-up demand in numerous economies or a faster fall in
inflation are plausible. On the downside, severe health outcomes in China could hold back the
recovery, Russia’s war in Ukraine could escalate, and tighter global financing costs could
worsen debt distress. Financial markets could also suddenly reprice in response to adverse
inflation news, while further geopolitical fragmentation could hamper economic progress. In
short, 2023 may feel like a recession for most countries in the world
Lesson learned from the great recession
Patience and perseverance in investing
Almost all the investors lost 30-40% of their portfolio’s value. As the market started to
crash, people began to panic, selling stocks even in India without adequate due diligence.
Some of the investors took a step back to analyse its cause and its effects on their stocks.
Thus the investors who stayed put with the stock, which had fallen only due to market
sentiment but was fundamentally strong, were saved from booking losses triggered by panic
selling. Thus, it is crucial to understand and analyse the situation and how it will affect your
portfolio instead of going along with the market sentiments.
Debt should be availed only to the extent you are sure to repay
The crisis took place as the banks had lent money to the subprime borrowers who could
not replay the installments later. The mortgages were sanctioned only based on credit score or
some basic policies to increase the lending. As an investor, one should be cautious regarding
the debt you can undertake, even if the banks and financial institutions are ready to offer you.
On the other hand, the lending institutions should have a robust credit policy to avoid
providing loans to subprime borrowers.
Don’t try to time the market
All the investors would have wished to time the market and buy the stocks when it is at its
lowest and sell at highest. But the entire market, including stock prices, are governed by
various factors that one cannot contemplate beforehand. You never know if the current low is
the lowest or there is a possibility of further lows and vice versa. A better way is to have a
financial goal and invest to meet the goal. One can use the methods of diversifying and
rebalancing the portfolio to manage the market risk and maximise the returns.
Give some time to your investments
As an investor, it is essential to make an informed decision. Just blindly investing because
its trending is not a good way of investment. One should spend time to read, understand and
[22]
analyse the investment option. It would be best if you had a hold on the events taking place in
the markets which are directly correlated to your investments. Taking ownership and actively
participating with your money will be good learning and of great help to your assets.
Sleep is better than greed
People, at times, get lured by fast and easy money. Getting into the market to make quick
money is never a good idea even though you might earn initially but might lose in multiple
folds if the fundamentals of investing are not understood. An investment that would make
your nights sleepless is not worth investing. One should know that the market has its inherent
risk, and it also operates in cycles of bulls and bears. So give priority to your sleep, and invest
with a logical and calm mind. It is said that ‘experience is the best teacher for the wise’;
however ‘, experience from others is a better teacher for the wiser’.

[23]
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