I'm taking 2 courses this semester, International Financial Management
and Strategic Management. Of the two, IFM is the harder subject
because its more technical and you cant smoke your way out (which
is my preferred mode of answering questions haha)
This was just one of the presentations we had, its on Market integration
and Contagion. The idea behind Market integration is how prices to move
proportionally to each other even though they are in different markets.
Just take a look at the European Union its an integrated market with
common currencies, policies, etc... Basically it promotes trade and boosts
growth, but there are also other factors to weigh in deciding whether to
integrate or not.
One of the cons of integration is this concept of "Contagion", which is
how crises spread through the interconnectedness of financial markets.
Think about the recent credit crunch and stuff, it spread from the US all
the way to Singapore and throughout the globe.
So on one hand, integration might be good, pegging exchange rates to
the US dollar, relying heavily on imports/exports, free trade agreements
& blah blah blah...
In the end when a crisis strikes, it'll just cause it to spread faster.
Imagine a class full of students, if one sick guy comes in and sneezes,
all those around him will get "infected". No matter how strong your
immune system is, there is still a chance of catching the bug.
Similarly, no matter how strong a country's fundamentals are, it can
still be affected by crises in other countries halfway across the globe.
Below's a visual guide to the financial crisis, take a look and i hope you'll
get a clearer picture of how contagion works - through media, through
market sentiment, through irrational exuberance, etc... Its just that easy
to get caught. You'll see how greed and ignorance fuels all of it - and at
the end the very instruments we used to promote growth of the economy
and stuff backfires on us.
Somehow i get this feeling that the cyclical effects of depression to
boom are "pre-destined" and meant to happen every 10 years or so,
do exploit it while you have a chance =)
**its definitely not "once in a lifetime" though, we'll get hit harder next time
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