Lessons for the Foreign Exchange Market from the Global Financial Crisis
A lot of people remember the global crisis of 2006 when the US housing market collapsed. Not only this wreaked havoc on the US but across the globe.
Many people would agree with me, financial crises are very common in history. The financial crisis leads to economic tsunamis in the affected and related economies.
Well, financial crises are inevitable, we can learn a thing or two from global financial crises. In this post, we have mentioned some of the lessons to be learned from the global financial crisis.
Be Better Prepared
The first lesson learned from the Global Financial crisis is that the foreign exchange market should be prepared for any kind of crisis. When the market is prepared for the crisis, it will be more capable to deal with the crisis. This will limit the damage both, financial and economic.
The market can be better off if the country’s vulnerability is restricted. For instance, if the inflation rate is low, the debt status is sustainable, and fiscal affairs are stable. Also, the market will be prepared to deal with a crisis in a better way if they have room to respond to external shocks using domestic policy instruments, i.e. monetary and fiscal policies.
Additionally, by understanding the conditions that might be present in all financial crises can help in being better prepared for future crises. These might include sudden reductions in liquidity, loss of confidence in the capability of financial institutions, and others. It is recommended to practice responses to some of the common causes.
Communication Should Not Be Stopped
Communication has a vital role to play in times of crisis. During a financial crisis, it is advised to communicate with the public related to the role of financial systems. The public should be aware of the policy actions during the crisis. This will help the public to understand the rationale behind the policy actions taken during a crisis.
Too Good to Be True
If the forecasts are too good to be true, then probably, it will not be true. Many policymakers extrapolate the favorable conditions into the future, mostly, without qualification. An important lesson to learn from the financial crisis is that every good thing has to come to an end; it cannot last forever. Everyone should keep in mind that if times are positive for a long time, there is a high chance the end will be extremely painful.
In recent times, there is no decoupling. Globalization of finance, trade, and labor have brought countries together. This means the impact of the monetary crisis on major countries will have an adverse effect on all other countries.
Self-Insurance Might be Helpful
For some experts, self-insurance against the financial crisis is useful. They believe by building their foreign exchange reserves. This might not be a good approach towards a fiscal crisis as alone it is not sufficient. It is because large holdings of foreign exchange reserves can create a false sense of security for the economic agents and authorities.
The country must have a great economic and financial policy along with a foreign exchange reserve.
Intervention Cannot be Delayed
Another great lesson learned from the global financial crisis is that late intervention is not an option. If the situation becomes dire or extreme, it might not be possible to yield good outcomes even if the decision is good. This is because the extreme conditions will lay the groundwork for a deeper economic recession.
Moreover, once the situation deteriorates, your options are also limited. It is because late intervention may require extreme actions.
The Spread of Coronavirus and Its Effect on Financial Market
The outbreak of coronavirus is, no doubt, a personal tragedy for all. It has brought plenty of uncertainty to the financial markets. So far, the impact of COVID-19 is still unknown. But there is optimism that this crisis will be defeated successfully soon.
The economic fallout from this virus is devastating. It has disrupted international commerce and trade placing huge pressure on the capital markets of the world. The forex currency pairs went through rapid revaluations while equities struggled to find solid ground.
Learning the right lessons from the global financial crisis is an excellent way to be better prepared for future monetary crises. These lessons should be implemented in order to minimize the damage of the crisis.
If you are looking for the best Forex traders in the Philippines, just visit the website. What lesson did you learn from the global financial crisis? Leave a comment and let us know.