In the United States, the Federal Government was left with no option but to initiate a bailout program to secure the financial markets and control the crisis before it spread to other parts of the world. Over a period of time the crisis became a global financial crisis and many banking institutions around the world felt the shock.
As the financial system faced rapid deterioration, many causing factors came to surface. There are many factors which have been pointed out as those which contributed to the banking crisis. This paper aims to analyze the literature which was developed prior to 2004 which contained information which could have been used to avoid the current bank failures and crisis which have reshaped the economy of the world. This paper will look at some of the root causes of the banking crisis and the ways in which it could have been avoided, while looking at the literature which was available prior to 2004 which could have been used to predict the crisis.
A report by the Inter American Development Bank (2004) states that in order to avoid costly banking crisis it is essential to understand what causes them in the first place. One of the prime reasons for the banking crisis was the deregulation. In the past there have been incidents where deregulation of a particular industry showed similar trends. One such example is the airline industry which did well initially following the deregulation but eventually some of the airline service providers were forced to face bankruptcy. This is one example which could have been used to determine what the outcome of unmonitored banking and mortgage lending practices could have resulted in. Secondly banks did not consider the integrity of the borrowers when lending them huge amounts of money. Even individuals who were not fit to obtain loans were approved large sums of money.
A) The US boom