The Global Financial Crisis has as its basis a failure of regulation. A Critical Discussion - Coursework Example

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The sequence of events building up to the global financial crisis can be traced from 2001-2008. It started with a financial innovation in 2001 which was followed by the imposition of other financial innovations. The gradually led to the building up of the housing and credit bubble which ultimately burst in 2008…
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The Global Financial Crisis has as its basis a failure of regulation. A Critical Discussion
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Download file to see previous pages The Global financial Crisis first began in USA’s sub-prime mortgage market and this gradually resulted in a global economic recession of a huge magnitude. In this mortgage market, the financial institutions issued sub-prime mortgage loans to householders. In most cases, these borrowers had unstable incomes and failed to fulfill the basic criteria of credit worthiness.

The borrowers mostly kept their respective properties as mortgage and the loans were issued to them against the value of this collateral security. During that time, there was an upswing in the property market and the financial institutions could easily realize the value of this collateral asset by a forced sale. Therefore, the lenders considered the property market a safe place and did not hesitate to issue loans against the property assets kept as collateral security.

A regime of low interest rate was prevalent at that time and the mortgage loans were issued at this floating interest rate. As a result, the borrowers had to repay a small amount of the loan every month. However, the U.S Federal Reserve Bank increased the lending rate of interest in the country. During 2004-2006, the lending interest rate in USA’s housing market recorded a sharp rise. Following this, the borrowing householders had to repay a higher installment of the loan to the financial institutions each month....
They tried to improve their financial situation in this way.2
In the property market, the supply of property exceeded the demand by a large amount, resulting in a huge decrease in the prices of the properties. Now, there were institutions in Europe, Asia and even Africa who had invested in the U.S market. The property assets which were given as collateral security in exchange of the loans issued in the USA were held by these institutional investors across the world. This was made possible by a complicated method of securitization resting on strategies of globalization. Thus, the repayments of the loans made by monthly installments by the borrowers were actually delivered to these institutional investors around the globe. Once the borrowers started defaulting, the monthly repayment of the loans stopped reaching the institutional investors. This resulted in huge losses for the institutions. Banks in the U.S.A and Europe defaulted; various stock indexes declined considerably, the market value of equities and commodities plummeted and there were large scale job losses resulting in unemployment in the economy. This financial crisis continued to spread to several countries of the world.3 4
The global financial crisis of 2008 had four features that were common with the other crises of the world: the increase in the assets prices that did not prove to be sustainable, upsurges in credit that resulted in increasing of debt burdens, the accumulation of marginal loans and the build up of systemic risk and the failure of regulation to control the crisis. It was seen that in the crisis, the regulatory regime had proved to be insufficient. In the developed countries, finance companies, ...Download file to see next pagesRead More
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