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Economic and Political Issues in Asia - Essay Example

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Economic and Political Issues in Asia Abstract The purpose of this paper is to identify the reasons behind the eruption of 2008 US financial crisis. Furthermore, this paper attempts to determine the major differences and similarities between 2008 US financial crisis and 1998 Asian financial crisis in terms of cause and consequences…
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Economic and Political Issues in Asia

Download file to see previous pages... The major differences between these two crisis can be identified as the implications of US financial crisis has global impact while the impact of 1998 Asian financial was particularly limited to South East Asian countries only. On the other hand, poor financial reporting can be attributed as the major cause of both financial crises. Reasons of 2008 US Financial Crisis The collapse of the Lehman Brothers had spread the terror in the global financial markets. The 2008 US financial crisis was one of the largest global economic crises marked in the modern world. The US government regulations started to wear away the lending standards in the middle era of 1990s. During that period Fannie Mae and Freddie Mac, the government owned enterprises were the owners of the huge share of the American mortgages. However in the year 1995, the US regulation increased the holding of loans in order to lower the borrower’s income. The United States government levied a regulation on Fannie Mae and Freddie Mac to lend loans with either less or no proportion of down payment. This policy of the government resulted on lowering the purchase capacity of the mortgages in order to recover the bad debts (Gwartney, 2009). The Community Reinvestment Act, 1995 regulated by the government also wanted the banks to grant loans in equal proportion to the number of the minority population existing in the financial markets. These objectives were met by the reduction of the conventional lending standards (Gwartney, 2009). There were two major reasons for the financial crisis in the year 2008 namely the increasing prices of the houses and the mortgage market being ineffectively regulated. In the initial stages of 1990, the increasing demand for the houses lowered the mortgage interest rates. Nominal rates are considered as important factor in the mortgage markets as it largely determines the repayment capacity of the borrower. Nevertheless, the financing of mortgages rapidly increased in the US market without the consideration of the nominal rates being decreased. This trend of decrease in the mortgage rates moved towards a drastic financial crisis in the US (Baily, Litan & Johnson, 2008). Precisely, the increasing demand for houses leading towards unstable price increase and skewed demand for mortgages by financial institutions were the prime reasons behind the eruption of 2008 US financial crisis. Differences Between 2008 US Financial Crisis and 1998 Asian Financial Crisis The most affected countries in the 1998 Asian financial crisis were Taiwan, China, Japan, Singapore, Hong Kong, and South Korea. The Asian crisis had started with the threat in the currency rates of the South East Asian countries of Malaysia, Singapore and Japan. Later the major causes of the Asian financial crisis accounted to the gradually increasing prices of the assets and the excess value of the real exchange rate. The rapid increase of the short term foreign borrowing was one of the major external causes of the financial crisis in the Asian countries (Institute of Development Studies, 1998). On the other hand the major causes of the US financial crisis were the unorganized mortgage markets due to the increasing demand for houses. The disturbances in the mortgage financing augmented due to the non-adherence of the nominal rates. The differences in both the financial crises lie in ...Download file to see next pagesRead More
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