This research is being carried out to critically evaluate and present reasons for the recent global financial crisis. The opening of the report consists of the explanations for the financial crisis. The entire explanations combine together to give an overview of the severity of the crisis…
The present article has identified that the cause of the recent financial crisis and economic recessions has been attributed to various factors in the economy. The initial trigger of the financial crisis has been traced to the toxic mortgage backed assets whose decline in value and uncertain duration led to massive losses in the U.S economy. Fannie Mae and Freddie Mac were both taken over by the US government. Lehman Brothers was declared bankrupt since it could not increase its capitalization. Merrill Lynch was bought by the Bank of America while American International Group (AIG) was rescued by the Federal government through an $ 85 billion capital bailout. Washington Mutual which is currently the largest bank failure was purchased by J P Morgan Chase. The crisis can be traced to the failure of the real estate market due to subprime lending which saw the commercial and residential housing prices increase for a decade from 1990. The Asian financial crisis of 1997-1998 saw the economies in Asia generate huge current account surpluses which were invested offshore in economies like US and UK in order to keep the nominal exchange rates low. The US stock prices went high due to the influx of capital. The high growth in economic demands and especially in China saw commodity prices such as minerals, oil and food soar up from late 2004 to late 2007. There are numerous explanations and arguments which have been proposed as the causes of the 2008-2009 financial crisis and the recessions....
The burst of the housing bubble led to massive loan defaults which led to the decline in the values of the mortgage backed securities (Freedman 2010). The subprime mortgages were risky since their true values were hidden in the house price appreciation which allowed mortgage refinancing. The real estate bubble was occasioned partly by easy credit in the economy which was facilitated by expansionary monetary policy of the Federal Reserve where the Fed funds rate was cut from 6.5% in 2000 to 1% percent in 2003 (Freedman 2010). Innovations in the financial system resulted to collateralized debt obligations and other derivatives which fueled the housing bubble. Losses of US subprime mortgages were estimated at $ 250 billion dollars in 2007 while the decline in the stock market capitalization was $ 26,400 billion dollars from the period July 2007 to November 2008. Weak banking regulations and poor risk assessment methods forced coupled with the government regulations which blended the operations of mortgage providers and investment banks saw many risky and unqualified customers access the housing mortgages (Freedman 2010). According to the Securities Industry and Financial Markets Association, the aggregate collateralized debt obligations issuance expanded from USD $ 150 billion in 2004 to US $ 500 billion in 2006 before increasing further to US $ 2 trillion by the end of the year 2007. The value of the Mortgage backed assets held in banks’ books, insurance companies and other major financial institutions explains how the burst of the housing bubble led to massive losses to holders of the mortgage backed securities. However, subprime mortgages had higher interest rates after the initial offer and only 43 percent of the adjustable rate mortgages were subprime ...
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Global Financial Crisis of 2007 had its beginning in United States of America with the crash of the home loan or credit market during July 2007. This credit crunch which happened in United States during 2007 rapidly spread to other global economies thus jeopardizing the global financial system.
Reasons have been analyzed for the failure of the financial markets. They have included faulting banks and investment houses for speculating under high leverage and low collateral, and homeowners defaulting on mortgages. Niinimaki (2007) noted a study that observed financial crises were usually preceded by periods of high defaults in the real estate market.
As a result, lending and investment in reliance on the weak macroeconomic model eventually culminated in a domino effect triggered by the collapse of the US housing bubble; which further raises questions about increased government regulation of the finance industry going forward.
The global crisis shook the very foundations of financial institutions and the stock market as share prices for small and large investment banks dropped significantly between mid 2007 and first quarter of 2008. Financial institutions lost nearly a third of their value in less than one year.
This view is a good one which will more or less be developed in this report. As far as establishing blame for the crisis, it may be perhaps be better to view the crisis as a business cycle because it is bound to occur again in spite of the current concern and efforts to set up corrective measures.
The primary cause of the global recession could be addressed to the collapse that occurred in the sub-prime mortgage market in the United States (US) accompanied by turnaround of housing as reported by several other economies. The impact of the global economic crisis not only affected the financial institutions but the livelihood of almost everyone to some levels or the other (Shah, 2010).
In such a scenario, the director can be said to be careless in the oversight of a corporation's operations in relation to finances and asset management. In most of these cases, the board is aware of the negligent mismanagement, but for some reason, mostly personal, they ignore it.
The first category is the macro-economic failures, which include monetary policies, fiscal policies, global imbalances and housing booms. The second category includes the failures in the financial sector supervision and regulatory policies and practices (Moshirian 2011, 502).
The author noted that observed financial crises were usually preceded by periods of high defaults in the real estate market. This view has recently been confirmed by an IMF report (2011), that financial crises usually follow "credit or asset price bubbles".
tgage crisis was the first indicator of the recent financial turmoil as there was a rise in loan delinquencies resulting in a decline in mortgage backed securities.
The most immediate cause of the credit crisis was the bursting of the US housing bubble (Almendarez , “The
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