The global financial crisis that gripped the world economy in 2008 and 2009 can be said to have been related to the Shanghai Surprise that sparked 80 years ago when the Shanghai stock exchange had a great fall arousing a global crisis. In this case, the value of currencies is lowered, oil and food prices go up leading to the starvation of many people. Investments are mostly affected by how human beings act or carry themselves and hence determine when and how this happens. An interaction of greed and fear affects how markets are operated such that when greed dominates fear, the market forces behave like a bubble that is ready to burst, and when fear takes over, the bubble bursts causing a crisis. This has been seen back in the years like in Mexico and Latin America in 1982 and 1994 and also in 1990 in Japan when their stocked peak got to a climax and then suddenly collapsed. Since then, this has prevailed until 2006 when the effects gripped the U.S in 2006 and Chinese stocks in 2007.
These bubbles can then be said to have been caused by what has come to be known as the fearful rise of markets. With the coming up of investment institutions and broadening of markets globally more bubbles and market trends have come along with it thus bringing about the economic global crisis. Some of these trends include the changing roles in the exchange market. Initially, banks controlled the decisions on lending which was only for professionals but this has changed with time where capital markets have taken over. People indeed tend to make riskier decisions when it comes to dealing with other people’s money than their own. A lot of people investing in one sector alone is another factor. Thirdly, the emergence of computerized models of measuring risk has led the investors to believe that markets can be controlled making them overconfident. There was also the impression that it was safe to invest in different assets thus making them venture into markets they had little knowledge about and eventually constricting the links. There was also the fall of banks and the rise of markets trade assets and stocks, currencies, and credits became interchangeable and with the influx of money, more assets were emerging, creating more bubbles.
The fact is that most of the above are good ideas and this brings about a challenge in trying to fix them. However, there are several ways that markets can be made fearful and more efficient. Previously, the financial crisis caused great losses to top investors but the latest crises saw a difference when governments came in to fund the top financial groups for them to carry on making people believe that risk-takers would be rescued in case of crises. However, the government needs to come out clear that they will not in the future rescue careless investors and this can be done through regulation of banks. With the creation of money markets, there was the emergence of a new set of institutions that operated like banks but who did not have insurance to protect their clients. These institutions must also be regulated just like the banks to allow banks to have short-term funding amongst them. Another solution is dealing with conflict that arises between agents and principals arising from risk transfer. To ensure security in such a case those that give out the loans must have a certain maximum of loan that they can grant. The problem of herding is brought out by the way investment managers are paid and categorized. Lack of proper performance makes investors pull away to some other crowded places attracted by the belief of safety in numbers and with this, the market goes up as well as the managers’ fee, though they may have contributed nothing. How fund managers are paid should therefore be revised and rewards other than the fixed fee should be based on performance.