The Issues of the Financial Crisis - Coursework Example

CRITICAL REVIEW By Course Tutor Institution Date Table of Contents Table of Contents 2 Introduction 3 Summary 3 Claims Made in the Article 4 First Claim 4 Second Claim 4 Problems with the Claims Made 5 Strength and Weaknesses of the Article 6 Strengths 6 Conclusion 6 Bibliography 7 Introduction Since the Great Depression in the 1940s, the new worst crisis to hit the globe is today’s financial crisis. The current financial crisis cannot be said to be new to the U.S. economy, since it started from the mortgage market and is now spreading beyond the commercial markets such as the real estates. One may wonder how this crisis has an effect on individuals. The effect can be seen in the increasing lending rates of banks, house prices drop and hence the rich buy many and sell at a high prices. All this contributes to a recession in the economy. Wignall, Atkinson and Lee’s article analyzes all the underlying causes of the current financial crisis and gives an estimate of what the economic policies, which are currently in place, deal with this crisis (2008, p.2). In my view, the authors have clearly identified the cause of this financial crisis when they point out that there is a need for more suitable reforms. Summary The authors’ article forms a foundation of how the issues of financial crisis were first researched on, and identifies the Reserve bank of Australia as the first researcher. I agree with the authors who point out that this is a problem that first started when there was a change in the business model of banks. Bank business models have been undergoing numerous changes as a way of showing they are leaving the traditional ways of commercial banking and adopting new ways. Well, this change is favorable in numerous ways; however, since the onset of this change, it has only brought more financial problems rather than solving them. As pointed out by Wignall, Atkinson and Lee (2008, p.5), the business models have been combined with numerous incentives that emanate from changes in taxes or regulations. Thereby, this change has only made the current crisis in finances to be worse. The report given by the authors starts with outlining the origins and causes of this crisis and proceeds to give excellent examples of the cause of the crisis. This is my opinion is an excellent way of introducing their study to readers. Wignall, Atkinson and Lee (2008, p.20) also make a point of giving their readers information regarding the most appropriate ways of exiting the financial crisis. This is no doubt in my opinion the most appropriate way to start and conclude on a research article. Claims Made in the Article First Claim The first claim made in the article is that the global macro policies that affect the liquidity are one of the causes of the current financial crisis in the world (2008, p. 2). In particular the authors reference the problem of liquidity as the key cause of increasing interest rates in United States, while reducing the rates in states like Japan. These are some of the contributors of an overflowing liquidity reservoir of financial crisis as the authors indicate. Second Claim The second claim made by the authors is that the financial crisis has also been caused by a poor regulatory framework. According to Wignall, Atkinson and Lee (2008, p.2), this has been the leading contributor of the current financial crisis in the U.S economy. The authors cite that this is not a problem that started recently, but has been there from the year 2004 and has been exerting so much pressure to the U.S economy. Problems with the Claims Made In the first claim, Wignall, Atkinson and Lee (2008, p.2) indicate that one of the causes of the current crisis in finances is because of global policies that have an effect on the liquidity. In my opinion as long as the rate of growth increases and there is a continuous rate of productive activities and the issue of liquidity is likely to go away. When global policies that are implemented force the banks to expand their rates of lending, this is likely to reduce a bank’s ability to lend. According to Wignall, Atkinson and Lee (2008, p.2), when the tax, remunerations and macro policies are not reinforced, most only end up creating conflicts in policy objectives. I agree with the authors on this because as they state, when market failures are noted, then it is wise to make reforms instead of having a reform of global interactions in taxes, among other interactions. In the second claim, I do not agree with the authors when they indicate that the financial crisis occurs mostly because of a poor regulatory framework. The fact is that the cause of a poor performance in the U.S. economy in these recent years shows that there is a decline in the profits made in the whole global economy. In my opinion, high risk financial activities have to pay for the right market costs of capital. If this is done, without any distortions arising from the regulations implemented or the bank structure, there will be an increase in profits made. In stating that when there is government support, the cost of capital becomes too low, (Wignall, Atkinson & Lee, 2008, p. 20) the authors prove that financial activities are the direct contributors to the problem of profits made. The argument, in which the authors engage the readers in, is challenging. The authors provide the reader with undoubtedly valid information while citing different global organizations such as Reserve Bank of Australia and The Office of Federal Housing Enterprise Oversight (OFHEO) to support their argument (2008, p.3). Strength and Weaknesses of the Article Strengths a) It is a convincing report: The authors have conducted a research that is very convincing to the readers. When the authors give numerous examples such as the Citi business model example on page 6, and the Northern Rock example on page 8. b) Use of many examples: The authors clearly support their views with graphs and charts, such as the one in page 12 and page 8. Weakness While the research has more merits than demerits, the article needs to be well organized in a format that a reader can easily identify the causes, strategies to use or the introduction of the article. The paper has no direct introduction, thereby confusing for a reader who may conversant with the financial issues. Conclusion In my opinion, Wignall, Atkinson and Lee, have made a good attempt to provide the solution for the current financial crisis. The authors’ insights on an exit strategy are of value to any organization or a state government that aims at changing its policies and bank business models. Though, as I aforementioned before the authors have not applied the example to individual experiences, the study is still useful for governments and organizations. Bibliography Wignall, A. B., Atkinson, P., & Lee, S. (2008). The current financial crisis: Causes and policy issues. Journal of Financial Market Trends, 1-21. Read More