Reasons for the Current Economic Financial Crisis - Essay Example

This paper analyses the major reasons for the current credit crunch or financial crisis.

Reasons for the current economic financial crisis
The major culprits for the current financial crisis were the banks. “A bank is fundamentally a rather dull old business. It keeps a small amount of its own money - capital - ready on standby should anything go wrong. But on that modest base, it builds an enormous balance sheet of two huge towers of cash: one of money borrowed, and the other of money lent or invested” (Davis). Banks thought that whatever money they collected from the public in savings accounts or term deposits needed to be lent for a higher rate to make a profit. So they tried to give loans to anybody approaching them without analyzing or checking the borrower’s financial capabilities. The high-spending American people approached the banks for everything whenever they are in financial requirements and the banks were ready to satisfy them. “The American subprime mortgage firms, who made a rash of bad loans to people with poor credit, can find little to excuse their behavior” (Who is to Blame for Credit Crunch)

The repayment period of loans allotted to the public was also fixed by the banks without any vision or purpose. Long periods were allotted to the borrowers for the repayment of loans. Moreover, the government also did everything to encourage the lending habits of the American public. The government encouraged the banks to reduce the interest rates of the loans they sanctioned and also to increase the repayment periods of the loans. The government miscalculated that the increased economic activities across the country would boost the economy.

The main problem associated with the current credit crunch is that banks would force to increase the regulations on loans sanctioned to the public in the future which will weaken the economic activities. “Because mortgage costs are rising and mortgage criteria are becoming stricter, many existing homeowners face the prospect of higher mortgage costs in the future” (Problems of Credit Crunch). The public would be forced to cut down their expenses which will again cause problems in the economy.

Conclusions
The current financial problems are caused mainly because of the improper lending habits of banks. Banks were ready to satisfy all the customers who approached them for loans without any investigation into their financial abilities. Interest rates were cut down and the repayment periods were increased by the banks to achieve more profits. The government also encouraged the banks in doing so which further deepened the crisis. Read More