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The Financial Crisis Of 2007-2010: Was It Simply The Result Of Lax Regulation, Or Were A Range Of Factors At Play - Essay Example

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THE FINANCIAL CRISIS OF 2007-2010; WAS IT SIMPLY THE RESULT OF LAX REGULATION, OR WERE A RANGE OF FACTORS AT PLAY? INTRODUCTION The financial crisis of 2007-2010 had its first interaction with the US economy in 2007. This crisis started from the US and then spread around the whole world…
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The Financial Crisis Of 2007-2010: Was It Simply The Result Of Lax Regulation, Or Were A Range Of Factors At Play

Download file to see previous pages... The closure of business functions resulted in unemployment. This shattered the trust of the businesses on the economy and specifically the financial institutions that actually drove the boom. The recession gave a very wrong impact to the consumers. The effects of the financial crisis can still be prominently seen on the global economies’ resisting to take up growth. The intensity of the financial crisis was very high. The seriousness of the impact can be noted from the fact that due to the financial crisis around 4000 banks in the US collapsed (Mike, 2013). The topics of the financial crisis have been discussed on a regular basis in many academics, business and institutional forums. Therefore, topic of the underlying debate has also been concerned to focus on the factors which resulted in the financial crisis. DISCUSSION OF REASONS OF THE FINANCIAL CRISIS World Bank reported that entire episode of financial crisis as a series of three event including the US sub-prime mortgage loans, followed by the bankruptcy of US investment giant Lehman Brothers (Baba & Packer, 2009) and final phase of the episode came to the picture as economic recession hitting hard to the developed economies than developing ones (Mike, 2013). To date, the recession is still resisting the recovery; therefore, in order to strengthen recovery it is important to assess the factors of failures. Tax System Implications and Bad Policies The implications of the tax system on the financial crisis plays very important role. The tax burden on the individuals is determined by the tax rates. The variation in the amount of taxes paid by the companies and by the individuals in any economy play a very vital role in determining the effectiveness of the implementation of the tax in that particular economy. Taxes along with being source of revenue from for the public finance also forms the core reason of business’s debt orientation. Since debt capital rising provides tax benefit therefore, business in order to take tax benefit attempt to take excessive debt. Further, in referred debt orientation to take tax benefit businesses sometime ignore the rising bankruptcy cost that rises in proportion to the debt; hence, increasing the chance of crisis with excessive debt (de Mooij, Keen, and Orihara, 2013) The relationship has also been asserted in the IMF report with two different models both having positive relationship as presented below (de Mooij, Keen, and Orihara, 2013): (de Mooij, Keen, and Orihara, 2013) Some researcher, in contrast, hold view that crisis has been caused from the bad policies and tax factor shall not be held responsible for it. For instance, Peter J. Wallison has presented a detailed discussion in the book entitled “Bad History, Worse Policy’ on the financial crisis of 2008. The author debated in specific reference to Dodd-Frank act, housing policy and other policies from the government that was unable to regulate the market in true spirits and hence the fragile economy collapsed. Complex Structured Financial Products Financial product increasingly took over the market as the financial market managed to take over the reins of the economy. Many financial products were complex in nature. New methods had been brought up by the banks and the financial institutes to promote more loans. Product innovations such as financial derivatives are given special responsibility for the crisis. Increased resort of the financial system to innovate ...Download file to see next pagesRead More
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