International finance is a study that entails the workings of the global financial system, exchange rates and foreign investment and how they impact international trade. International finance is a vital ingredient in the decision making process of many firms.
Every entity is faced with the inevitable reality of making financial decisions in the following departments; investment for instance where to open shop, dividends for example whether or not to pay and when, working capital management such as the amount of liquid cash to hold and in what currency and financing for instance the nature of the capital structure and where to source the money from. (Fender & Gyntelberg 2008 149).
The global financial crisis that was witnessed all over the world was the worst to be experienced. It resulted to the tumbling of large financial institutions, collapsing of stock markets and general decline in the wealth of consumers. This came about as a result of shortage of cash in the United States banking system hence eroding consumer confidence in its wake. All the economies worldwide were adversely affected as a result of decrease in the availability of credit and reduction in international trade (Jesse & Powers 2009 76).
Central Bank usually purchases foreign currency when it wants to increase the supply of its local currency. This is done to stem the shortage of local currency in the economy. During periods of inflation, Central Bank buys the local currency and sells foreign currency and in effect the money supply in the economy is reduced. (International Monetary Fund 2009 a 85)
The United States Federal Reserve together with Central Banks in the whole world were forced to increase money supplies in the economy to guard against aggravating an already awry situation. The United States Federal Reserve, the European Central bank, Bank of England and Bank of China had to act with unprecedented urgency to rescue their respective economies and that of the world at large.
They had to buy $2.5 trillion of government’s debt and struggling private assets from banks. The governments of the European countries and the United States raised the capital of their banking systems by $1.5 trillion through the buying of preferred stock in all their major banks (Levchenko et al. 2009 141).
The great recession that began in 2007 came to an end in June 2009. The financial crisis also came to an end almost at the same time. The president of the United States was quoted saying that the markets had become stable and that most of the money spent on the banks had been recouped.
In China, United States, England and most of European countries had their economies recover after the financial crisis validating the efforts that their governments had put towards guarding against the recession. There are exceptions nonetheless; countries such as Greece and Spain were not so lucky hence they had to be bailed out for the second time or their economies risked being battered to oblivion. (International Monetary Fund 2009b 48)
In grappling with issues to do with financial crisis like how much money to inject into their economies, the Central Banks had to contend with the issue of not injecting too much money into the economy resulting to inflation.
The United States Federal Reserve did not agree on this view and they injected more money into their economy than any other Central Bank. Central Banks were justified to have done what they did. This is because the financial crisis was self-inflicted hence it needed such extreme measures to alleviate it and thus what they did was approved.
Fender, I. & Gyntelberg, J., 2008. Overview: Global Financial Crisis Spurs Unprecedented Policy Actions. BIS Quarterly Review. Vol 6: 1–24.
International Monetary Fund., 2009. Review of Recent Crisis Programs. Washington, DC: IMF
International Monetary Fund., 2009. World Economic Outlook: Washington, DC: IMF.
Jesse,M. & Powers W., 2009. Did Trade Credit Problems Deepen the Great Trade Collapse? In The Great Trade Collapse: Causes, Consequences and Prospects. New York, NY: VoxEU.org Ebook.
Levchenko, A. et al., 2009. “The Collapse of International Trade During the 2008–2009 Crisis: In Search of the Smoking Gun.” Research Seminar in International Economics Discussion Paper. Vol 592.