Wednesday, April 3, 2019

Causes of the Financial Crisis

Causes of the Financial CrisisIntroductionFinancial crisis occurs when in that location is instability in the finance organisations which pose danger to the sparing, political, social and inter case affairs jumper lead to decisive changes. It de subroutine reveal perspectives on the functioning situation of m peerlesstary economies. Financial crisis does not affect only the country itself it is like a contagious disease that spreads to neighbouring environments and across to its partners especi eachy in this modern conviction where the world is interconnected. It is pecuniary mis guidance which leads quickly to economic destruction, diminishes individual and national wealth, lost growth, etc.It is an interruption to monetary markets which is connected with pedigreeing asset prices that pass on force in the inability to pay debts among debtors and interminusediaries that spread control through and through through the pecuniary body. By this happening it pass on c ontract unhealthiness to the flow of markets capacity to pump capital within the parsimony.On the nates of international crisis, this commotion ordain overflow into national borders, causing disturbance to the markets ability to al toilet capital internationally. When this happens, no one befools blame or at least give admit that they figure it coming. It causes a cope of violent changes around the country and across the populace with devastating consequences.On the aspect of Private and individuality this lead give to unemployment masses leave alone not be able to find work, overtaking of properties, families will lose their star signs to foreclo received bear upon and many will be in arrears on their mortgage payments. Househ hoar wealth worth a lot of billions of Euros will disappear, life savings, retirement accounts all will go fling off the drain.Business and commerce large and small concernes will feel the burn up of the economic recession. Manufacturing w ill decline, global trade will diminish, and some will file for bankruptcy and be forced out of blood line (Angelides and Thomas, 2011) race will become angry about what is happening. Some pot who hire worked strong all their lives, obeyed the law and played by the rule will probably find themselves out of work and about to lose their family firms will not know what the future has in store for them.The segment who is broadly speaking affected by any pecuniary crisis is the private people and the communities. Businesses will move out of communities, banks will stop bring in money thither will be shortage of currency flow, consumers reduce their dangleing and lots everything is at a standstill. The after effects/impacts of the crisis stays on and will be felt for decades to come, and rebuilding the economy takes a lot of hard work and dedicated efforts.In this research paper I will discourse the causes of monetary crisis what be the reasons why from time to time on th at point is an economic recession, and enumerate why certain financial crisis are contagious. I will use the 2008 financial crisis as case study to garnish my answer, and finally conclusion.Causes of financial crisisThe causes of financial crisis could be a little compound and not a very straight forward explanation could be given. It is a crisis on one hand that could be blamed on political science action, and on the some other hand, it could be blamed on presidency inaction (is not doing enough) but the bottom line is that it is a trouble cause by human beingnesss. It is not caused by nature or com upchucker error. Financial crisis have occurred dozens of times since the seventeenth speed of light (The Economist, Jan., 2009). Understanding financial crisis is crucial in avoiding them, but that leaves the question why financial institutions and their agencies/bank regulators never see the possibility of crisis coming? The crisis that occurred in 2008 which was the most rec ent and will not most probably be the last was the most severe and the most global since the Great falloff of the 1930s.I must not discontinue to point out where this crisis started from or its origin. Financial crisis is always associated with the financial systems of global powers, and the one that happened in 2008 was no exception. Since the collapse of Soviet Union, United States has been the dominant superpower and while momentarily being the most influential and extremely powerful nation was upright of assurance that economic liberalization and the rapid growth of communications applied science would give the world economic expansion.The move towards integrated global economy has been instrumental in the amassing of wealth by a few individuals which has created inequality. In the process of the presidency trying to bring down the gap amidst the haves and have nots in the US some of the policies gave climb up to the financial crisis.We human beings have always been obses sed with money, and have the undue desire to acquire more of it. And generally people tend to spend more than they have banks are willing to give loans and these loans some will be paid back and some will not be paid back, by so doing this is creating huge debts that have the potentiality to cause a dramatic effect to the financial set up of the country.This is part of the reasons why from time to time Central banks pumps money into the financial system so as to have enough money in circulation. before the start of the crisis financial institutions (mortgage brokers and bankers) were high spirited and excited about the financial bubbles that they became very optimistic and began to take huge financial encounters. The professionals put in charge to manage public finance tend to ignore warnings and fail to ask questions, and not able to manage evolving essays.Failures in the financial commandment and the lack for proper supervision When it comes to finance, in that location must be laws and rules put in place to govern the procedures. These principles must be adhered to irrespective of record or circumstances. Financial experts put in charge of all financial institutions must discharge their duties potently and professionally by acknowledging that they are on that point foremost to nurture public money and to regulate the financial system if possible overhaul them from time to time.Financial institutions should not regulate themselves. When financial institutions regulate themselves, security protection that ensures safety and avoid sudden and widespread disaster of public money could be removed or not followed strictly. With this approach trillions of dollars will be vulnerable. By governments allowing financial firms the choice to carry their own preferred regulators to work with always results in the supervising being weak. In the financial system, regulators have lots of powers in different areas to protect it (the financial system) but out of the ir own reasons they do not do so, that is oversight.The collapse of the housing bubble The financial crisis of 2008 which started in the US as the result of a downturn in real soil value caused primarily by rising defaults in subprime mortgages. The government further financial institutions to make mortgage loans available to low income earners and the underprivileged in their several(a) communities under the Community Reinvestment Act (CRA) in an effort to bridge racial equality and change magnitude homeownership by lending one hundred part loans for mortgages with no down payments. In the past there had been charges of racial secernment with regards to not approving housing loans to minorities and the low income earners. To facilitate the granting of this mortgage loans a lot of times did not require all necessary documentations from the borrower and their income details. In this case a lot of this underprivileged income earners were paid on cash basis, so there was no offic ial evidence of verifying there actual income. But a lot of subprime lending did not take place under CRA sponsorship. rather the majority occurred with Countrywide and New atomic number 6 rather than commercial banks such as Wells Fargo, Citibank, and JPMorgan Chase (Friedman, 2011) at that place were lots of little programs developed by the US government at both(prenominal) the federal, state and local levels intended to encourage more people to buy homes, thereby channelling more artificial demand into the housing vault of heaven like The Pro-ownership Tax Code. Developers were frequently receiving hand outs, free land, new roads and imposeation privileges to build new homes. First-time homebuyers in some areas received thousands of dollars tax credit.There were special treatments in agreement to buy a home as an investment, for example if a couple bought a house for fractional a million dollars and sold it for one million they will not pay capital gains tax, but if that couple invest in business that same money in stock or any other business that is not real estate and later sell that business for profit they will pay capital gains taxes of fifteen percent. Woods junior (2009) in his publication said it is not to suggest that any of these tax breaks are undesirable or should be repealed a tax break is an oasis of freedom to be broadened, not a loophole to be close upd. Instead they should be extended to as many other kinds of buys as possible, in order not to provide artificial stimulus to any sphere of the economy.Americas provideeral Reserve started the boom by increasing the supply of money through the banking system with the purpose to reduce care order. This system stimulated growth in the production of longer term projects such as construction, raw materials and capital goods. So this low engross rate do construction and real estate flourish cleverly in the early 2000. Real estate is not a prevalent category of products that all co nsumers demand because of affordability in terms of credibility and finance. In order wards not enough consumers out there could afford to purchase expensive homes. So the Federal Reserve (Fed) came up the idea to plus money supply through banks, and banks with loose lending principles made home purchases went beyond the usual, and the notion of living the American dream was not far-fetched. Fannie Mae and Freddie macintosh (Federal National mortgage Association and Federal Home Loan Mortgage Corporation) including the Federal Housing Administration were all backed and sponsored by the Fed to be lending money to people who wanted to purchase houses. Criteria for lending were lowered and loans were approved at a record breaking level. wholly the new money that the Fed created was being routed into the housing market through their representative agencies Fannie Mae and Freddie Mac. This stimulus was the biggest that gave unnatural rise to the housing prices.Housing prices went up q uickly instead of taking a gradual rising process supposedly with the rate of inflation or the rise in bonnie incomes the bubble eventually busted and the housing prices went down and this caused the housing market to collapse and recession followed borrowers were prone to increasingly rising interest rates and falling home values, and could not be in a line to refinance their mortgages leading to higher monthly payments and constant failures to meet financial obligations resulting in foreclosures.Because of the causes arising from these defaults substantial amounts of low investment grade-rated mortgage-backed securities to default and the highest rated securities to be downgraded. The US government refusal to rescue the Lehman Brothers and eventually filed for bankruptcy was also another fall in abundance of hope. Financial institutions memory mortgage backed securities started opus down their relative worth which made them to become more financially vulnerable, as a result ca using concern over counterparty risk and as such organisations started withdrawing from doing business with them (Kolb, 2010)Financial institutions inclination on risk taking could cause financial crisis. There was a view that instincts for self-preservation interior major financial firms would shield them from fatal risk-taking without the use up for a unconstipated regulatory hand, which the firms argued, would stifle innovation (Angelides, Thomas, 2011) when financial institutions act recklessly by taking too much risk something is bound to happen, especially when institutions are involved in commerce, and in trading, money can be made as well as lost, example, large investment banks and bank holding companies tend to centralise their activities more on risk trading activities that bring in heavy profits. They expose themselves to danger in acquiring and qualification loans to borrowers with poor credit rating.Some of these institutions grew competitively as a result of poor ly executed acquisition and integration strategies that made effective management more challengingFinancial institutions and some credit rating agencies are adopting mathematical models to be used as reliable predictors to predict risks, by so doing replacing judgement in a lot of occurrences. in the first place the financial crisis of 2008, the Republic of Ireland enjoyed a long period of economic boom, both in credit growth, bubbles in real estate, excellent and educated workforce, and an captivating location for inward investment especially from the US firms. These attracted people from all over the world to come and live in the country. Because of the rise in population there was urgent need for more houses to be construct which brought growth to the construction industry and Ireland recorded the highest number of employment in the history of the state. All these led to the boost in the banking sector. The banks were willing to lend, in fact banks were literally forcing people to take loans even if they didnt need them. Credit cards were being issued to customers as long as there was weekly income coming into their account despite the fact these customers did not take for credit card. Home owners mortgaged their homes. A lot of people were encouraged to buy houses incentives were given to fist time buyers so as to remind them. At the bust, the economy collapsed, companies started folding, people were made redundant, unemployment rose, banks started feeling the heat and government came to their rescue and bailed them out.A lot of money was pumped into real estate and prices of homes went up. As a result of banks lending money anyhow to people personal debts were rising faster than income and foreclosures everywhere. Banks stopped lending, and prices in the market dropped.The 2008 financial crisis was contagious spillover resulting from the United States subprime market. The cross-border processing was moving with great speed because of the close connect ions inside the financial set up and the powerfull organised supply chains in global product markets. Financial crisis of 2008 was contagious because we are now in a global market. There is evidence of square increases in cross-market correlations in the more recent times. Global market, social media plays an effective roll, stock markets, single currency such as the Euro and the Eurozone, all trading at international level. What happens to one affects all.ConclusionJudging from a lot of the information surrounding the 2008 financial crisis and its causes, it was more like it happened mainly because of government oversight to supervise and monitor the financial experts and their institutions to constantly make sure they are in alignment with the regulatory systems is not appropriate that have the appearance _or_ semblance to miss the whole point, but rather too many loans were issued on risky basis to unqualified customers that were not credit worthy, and the government fully awar e of this encouraged and kept on pumping money into circulation for their political gain.The old ways of scrutinising applications for loans were abandoned by the lending institutions for a riskier method so that everyone get to live the American dream.BibliographyAngelides, P, Thomas, B (2011) The financial crisis inquiry deal Final report of theNational Commission on the causes of the financial and economic crisis in theUnited States, Government marking Office.Barton, D., Newell. 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