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Portfolio of Economic Crisis

Introduction

Global financial crises having a great impact on the developed and developing countries and its economic growth. It can create a serious situation such as uncertainty in inflation, interest rate, increase in unemployment, decrease in the demand and slowdown the GDP of the nations. All these elements have an adverse impact on the business and its future growth rate (Fratzscher, 2012). A financial crises is often associated with a panic on the financial institutions such as banks where investor sell off their assets or withdrew their money form bank accounts with the expectation that the value of assets will drop. In the historical aspects of economic crises was worst in 1929 which was the economic disaster for the world. The present report is related with the 2008 economic crises. In 2007-08 the global economy faced one of the most dangerous crises after Great Depression 1929. the purpose of this report is to understand the causes of last economic depression and determine the forecasting tools and techniques which can predicting such crises in a business environment (Claessens and et. al., 2010).

Q.1 Identify and analyse the main causes of the economic crisis 2007-2008

In 2007-08, the world experienced a major financial crises which one of the most serious recession after Great Depression 1929. Both the financial crises and slowdown the United States economy affects all other countries which can transform a global crises. In mid 2008. Lehman Brothers which is one of the leading investment bank failed and companies laid off large number of staff due to recession. This is actually perfect storm which has been brewing for now and finally reached its breakdown point (Carballo-Cruz, 2011).

This is one of the major cause which comprises vie various elements. The new credit lines can increase the flow of money and slowed financial growth. It has been hurt various investors, multinational companies and banks. The another factor was lower rate credit which promote individuals ton buy houses. Such system create too much money in the market where people to spend that money (Milesi-Ferretti and Tille, 2011). Unluckily, they wanted to buy the same thing which can leads to increase demand and increase inflation. Large number of investors give billions of dollars of debt to purchase organizations which can not transform in term of value what they expected. Apart from that, at the same time the prices of oil gone higher which can leads to increase unemployment rate.

Credit is a tool which are used by all economies in order to maintain its growth and employment in the market. It is used to increase the demand for various products such as car, houses and other investment products in order to create good return from its in the near future (Cour-Thimann and Winkler, 2012). But in last decade credit got out of control in the US economy. Mortgage companies identified who got loans, then transfer responsibilities for those loans to another organizations through mortgage backed securities. Brokers who responsible for approved such loans by packaging these bad mortgages with other mortgages resale them in terms of investment. Large number of people took loans in the hope that they could earn profit out of them and purchase houses as a investment which was not good for them (Masini and Menichetti, 2012).

Due to lower interest rate can leads to increase the credit which can leads to increase the demand of houses. The housing slump having a great on impact in economy. Changing in mortgage rates are effect persons and investors through which mortgages are no longer be affordable by them. Further, as a result it can reduce rate of mortgage backed securities and various banks and financial investors are loosing money. Prices of houses are tends to decrease and growth rate of new building has been reduce through this effective factor. Decreasing housing prices able to create various complications like; value of new homes are less then the mortgage. Affordable rates are accepted by them but unaffordable going to reduce their profit efficiency (Bekaert and et. al., 2014).

Some massive damages are affected to banks and financial institution as they are merged with other institution in order to come out from great looses and easily bought out. Some banks are still working through receive benefits from government which are framed in their interest and they are lucky enough. Greater number of institutions are unlucky as they are crashed. Mergers of different banks is the best possible solution which remove conflicts and simply bought out (Giannetti and Laeven, 2012).

Lots of banks and financial institutions are facing loses from risky mortgage backed security which no longer be affordable by them. If present loans of banks are not present positive view of cash flow then they cannot loan more money to persons and other institutions. The biggest solution for solve this problem banks needs to lend more money to financial institutions and other organizations. It is basic advantage for them to recover their position and enhance their profits as well. Opportunities are provide them in order to solve problem of risky mortgage securities and meet current economic condition (Beltratti and Stulz, 2012).

Q.2 Critically evaluate the effectiveness of tools used for forecasting events and predicting crises in the business environment

It is essential for business organizations that to determine the potential risk and forecast the risk and its impact on the business. There are various tools and techniques which can be used in order to overcome potential impact from any risk. These are two types of methods as given below:
Quantitative method:

Trend extrapolation Approach: This techniques is most widely used in the forecasting and predicting the economic crises. This approach is based on mathematical concept to extrapolate to the future event. The assumption of all these techniques is that the forces responsible for creating the past, will continue to operate in the near future (Wagner, 2010). This is sometimes a valid assumption for the short term forecasting. It can be fail in the medium and long term forecasting due various other factors. This concept is working when environmental factors are stable in the determination of the future event. There are different quantitative model for the for predicting trends and economic cycles. Selecting a suitable approach for the particular forecasting application can depends on the historical information and data. The research of historical information is called exploratory analysis.

Simulation Approach: Simulation approach includes apply analogs to model complex systems. These analogs can take on different forms. It is equation to forecasting an economic measure would be a mathematical analog. There are various analog such as S-curve, multivariate statistical techniques, Multiple regression, Gaming analogs etc. These approach can be used to model complex systems which can involved relationships between more than two variables. Multiple regression analysis is one of the most common technique (Sabato, 2010). Unlike trend extrapolation tools, which only consider at the history of the factors being forecast, multiple regression approach consider at the relationship between the factors being forecast and two or more other variables.

Advantages of quantitative methods

  • At the time of analysing the data can be manipulated which can not create a clear picture of forecasting.
  • There are various uncertain events which can not covered in calculation and evaluation.

Qualitative method

Cross impact Approach: This is a qualitative approach which related with the relationships often exist between future events and developments that are not exposed by univariate predicting tools. The cross-impact matrix concept recognizes that the occurrence of an event can, in turn, effect the likelihoods of other events. The researchers can assign probabilities for the likelihood future event and evaluate effectively (Messai and Jouini, 2013). Probabilities are assigned to reflect the likelihood of an event in the presence and absence of other events. The resultant relationship structure can be used to examine the relationships of the elements to each other, and within the overall system. The advantage of this tool is that it forces forecasters and policy-makers to look at the relationships between system elements, rather than viewing any factors as working independently of the others.

Combining Approach: It seems clear that no forecasting tools is appropriate for all situations and conditions. There is substantial evidence to demonstrate that combining individual forecasts produces gains in forecasting accuracy. There is also evidence that adding quantitative forecasts to qualitative forecasts reduces accuracy (Levine, 2012). Research has not yet revealed the conditions or methods for the optimal combinations of forecasts. Judgemental forecasting usually involves combining forecasts from more than one source. Informed forecasting begins with a set of key assumptions and then uses a combination of historical data and expert opinions. Involved forecasting seeks the opinions of all those directly affected by the forecast. These techniques generally produce higher quality forecasts than can be attained from a single source.

Advantages of Qualitative methods

  • It is less expensive and time saving approach as compare to other tools of forecasting.
  • Factors can be discussed in detailed between the opinion of experts and policy makers.
  • The data that is collected comes from a few cases or test subjects and cannot be universal to a larger population. The results or findings can be transferred to another setting (Syllignakis and Kouretas, 2011).

Q.3 Discuss in terms of strategic crisis management theory, what organisations need to do prior,during, and after such an event to survive and perhaps thrive.

This is important for the business organisations to make a pre plan for their upcoming crises. It is natural that to make a effective crises management plan which can help to save them from potential financial risk (Ongore and Kusa, 2013). There are various models which can be used to overcome or manage their financial crises more effectively as given below

Gonzalez-Herrero and Pratt approach

This method includes three stages which manage and save potential lose in their business due to future economic disaster

Diagnosis of crises: This is the first stage where companies are required to detect and identify early indications of the crises. Therefore, leader and managers of the business units to feel these indications and warning signals. There are various warning element which can indicate the future financial crises as given below

Uncertainty in oil prices: This is one of the major indicator which can help to analyses the potential financial crises. The main reason is that there are large number of companies are operating their business in this sector and all industries can not operate without oil. Therefore, fluctuation in the oil prices can impact on the business. When look back in 2008, oil prices are under 40 dollars per barrel (Fratzscher, 2012).

Political situation: This is another significant signal which are related with the political situation. It can be positive relation between political stability and economic stability. If there are government stable in the countries which can promote a sound economic model and consistent growth. On the other hand lack of government stability can increase the chances of financial disaster. For example, in the present time there are various countries such as Greece which are facing both crises which may impact on the growth and development of other part of the world specially for the European nations (Claessens and et. a

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