The Crash Analysis - Report Example

The Crash Analysis

Understanding the crash one must contemplate on the financial systems through which investments are made. The strength of the economy is generated through investment and solid financial systems that enable the public to gain profits from their investment. Nonetheless, bad choices by financial institutions or rather cases of fraud by financial institutions cause a crash of the financial sector. The crash causes a considerable number of losses to the firm, investors and the general public involved in the financials of the company. The paper will be categorical in analyzing the crash through various facets of the financial industry that spur those situations. Therefore, the article will categorically discuss the housing bubble, the concept of free markets, the construct of compensation as well as the position of the government and its role in the financial sector.

The Housing Bubble

Informed by the rates of investment in the housing industry, a housing bubble is created by a set of situations that project an increase in housing investment that later become problematic in the financial market. Following the basic principle in any business, the housing industry is based on the law of demand and supply. These principles inform the trends in the housing and thus informing on the financial investment opportunities. The origin of the housing bubble is created by the situation where the demand for housing increases the prices of houses in the market. Thus, the higher the demand coupled with little supply to match that demand, the prices of housing increases. The market reacts to the demand created in housing and further sparks growth of the housing investments. Due to the great investments with the aim top scoop the high prices that resulted from the demand. Soon after, the supply starts to match the demand, thus stagnating the prices with less or minimal increase in prices (Martin 590). However, the information is not available to the investors and thus, cognizant of the initial spike in demand and prices, more investors continue to invest in the housing sector. The speculators within the market tip the balance with an increased supply of the houses to the market, with less demand being generated from the market. The result is the sudden drop in prices of houses and bursting the bubble.

The bubble effect is nonetheless, not unique to the housing but somewhat common in the financial market. The bubble is used to refer to the situation that spreads the trading of the particular class of assets way beyond the sustainable levels in the long run. Cognizant of this, housing is more afflicted by the bubble effect due to the increase in housing demands from time to time and whose assets are readily available to the public. For instance, the evaluation of house of junk stipulates the bubble effect and its direct consequences to the finances in the housing complexes. The financial market responds first to the demand created by the market, but the increase in the investment of the finance options spell doom to the financial sector attributed to the surplus of the supply of the finances based on little or no securities of the finances. These thematic approaches to investment on unsecured finances aid to the bursting of the bubble and further the crash that affects the entire financial market. As a result, billions of shillings are lost by the speculators, investors, homeowners and even the financial institution entrusted to the investment processes.

Free Market

The concept of free market is perpetuated by the capitalist thought that seeks to increase the participation of individuals within the economy. As a construct within the economy, the free market is an ideal that thrives on the integrity of the partners playing a part in the economy, especially the financial institutions used for investment purposes. Nevertheless, the ‘free’ concept in its applicability is otherwise mere words within the economy. Regulations exist to ensure equity in the market and safeguard the interests of the weak in the economy. The process is informed by the capitalist ideologies that often seek to take advantage of the masses and through the concept of free market and after that declare losses to make way with vast amounts of money.

Deregulation of the financial institutions such as the big banks in the hope that they will act within the confines of the law and ethics is doom to the general investors. Although the banks rely on the free market to run the business, a more in-depth analysis of the crash stipulate the pitfalls that exist within the economic constructs. While the big financial institutions are cushioned against the market crashes, through insurances and government bailouts, the ordinary investor is left at a loss of the investment (Treeck 428). The deregulations further spread the capitalist thought that is only considerate of the profits of the company rather than on duty to the investors. Therein, the liberalization furthers the corresponding losses that affect the financial markets during a crash.

Compensation

The drive towards profits and making money through financial investment is among the most lucrative areas of the economy. Extremely competitive spirits drive most people who make money in the financial markets and often in disregard of the rest of the people as long as they make money. Making trades in the market require the analytical skill to predict the positive outcome of the bets made in the financial market. In making that trade, it would be plausible to either make a profit or loss from that investment. I would opt not to participate if presented with a situation that would generate millions of money at the expense of bankruptcy of the company. In this regard, there is information by the ethics that guide the financial trading and the consequences that follow such a step.

The role of the government

The government plays a huge role in the regulation of the financial markets as well as safeguarding the interests of the citizens in the economy. Regarding this, the position of the government in the financial market is often not welcome by a range of financial institutions. The financial market in the presence of the fostering free market ideologies enacts their own rules and regulations to denote their control of the financial sector. However, the regulations are blended in such a way that the only beneficiaries of the rules are the financial firms. The analysis of the movie inside job produces such a scenario. With the statement by Robert Gnizdaw, the Wall Street government is a representation of the self-regulatory rules to the game. The regulations that exist are formulated by the financial firms for the financial firms. Through such regulations, illegal and unethical financial practices progress through loopholes that exist within the regulatory framework.

The Wall Street government is a representation of the financial market based on the free market principles. The market employs the context of the regulations or insufficient regulatory base to make sure that profits of financial firms are gained at the expense of the investors and familiar stakeholders in the businesses. The financial cushions exist for the corporations but in existence to the investors. Further, the availability of sufficient information to make a well-informed investment is not common knowledge to the common citizen in the financial market. Therefore, illegal behavior would be familiar with that level of misinformation about the state of the market and individual investment. Further, the consequences of such maneuvers in the financial market are lenient and had to prove and gain evidence on the same. With the guise of making losses, the financial firms can make billions in personal profits while the investors and the company make losses. With such massive losses, government bailouts to the corporations bring them back to the market with no consequences for the perpetrators of the actions. The reality of the financial market stands due to self-regulation that allows for the financial firms to take up their activities with little or no oversight.