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Market Failure - Case Study Example

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This paper "Market Failure" discusses the stock markets that are not for the chicken-hearted. They can take an individual or an economy on a roller coaster ride from huge profits to deep losses. The year 2008 was marked by volatility in the world stock market due to the subprime mortgage crisis…
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Market Failure
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Download file to see previous pages Once the US market tumbled the markets around the world followed suit. Some Asian markets even lost 40% (China)while others lost almost 60% (India) in a matter of months.
Most analysts hold the subprime lending crisis as the root cause of the current economic slowdown. In their enthusiasm to outdo other banks and get the maximum number of customers, banks were ready to lend any amount to anyone, without even verifying their creditworthiness properly. As a result, many banks had to close shop, including big names like Citibank and Merryl Lynch. Thousands of people the world over lost jobs, companies had to be bailed out and even turn to government support for their functioning and existence. The latest victim is the automobile giant, General Motors. After being the iconic company that it was, it had to declare bankruptcy and carry out a sale to the U.S government.

The subprime lending crisis does not seem to be an isolated one in the financial world. Persistent industrial loan defaults and massive loan losses have become a regular feature in developing countries. According to Hoque (2004) and the World Bank (1993), 150 development banks in 33 developing countries have been haunted by massive debt default and loan loss. The present subprime mortgage crisis that hit the credit markets and banking systems are due to the massive increase in loan defaulters, thus forcing the banks to go bankrupt.

Industrial Development Finance Institutions (IDFIs) form the backbone of the economy in both developing and developed countries. These institutions are expected to stimulate industrial investment in both the private and public sectors in the country. They play the key role of injecting capital into the system. However, a job bigger than that is to blend capital with entrepreneurial skills to support industrial advancement in an underdeveloped economy. This is precisely what IDFIs are doing in the majority of the countries. A great number of IDFIs have been established in the developed and developing countries since 1945, much following independence in the late 1950s and 1960s of former British and French colonies, to provide both media- and long term loans to industrial and agricultural projects.  ...Download file to see next pages Read More
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