The Reasons for the Recent Global Financial Crisis - Coursework Example

Critically Evaluate the Reasons for the Recent Global Financial Crisis Table of Contents 0.Introduction 3 2.0.Critical Evaluation of the Reasons for the Recent Global Financial Crisis 4 3.0.Conclusion 8 References 9 1.0. Introduction A financial crisis usually signifies major interruptions into economic markets that eventually raise the level of the crisis through which the credit flow towards businesses tends to get unfavourably affected. Moreover, through increasing the level of the crisis, along with the effectiveness in the credit flow towards businesses, the real market of services and commodities is also observed to be inauspiciously affected with the evolution of the crisis (Jickling, 2008). In this regards, it has been identified by experts that the current worldwide economic crisis possessed a considerable impact especially upon the stock markets, larger financial institutions and also in the global economies of the countries. In lieu of this, due to the rapid rise of worldwide economic crisis, the global stock markets had been observed to slacken along with the collapsing of larger financial institutions to a certain extent (Shah, 2010).Therefore, in this paper, an overview of worldwide monetary crisis, critical evaluation regarding the root causes of the crisis along with a effective conclusion will be portrayed. 2.0. Critical Evaluation of the Reasons for the Recent Global Financial Crisis Various noteworthy reasons can be observed for the formation of recent worldwide monetary crisis. According to Bessis (2011), the worldwide economic crisis was mainly originated through the “sub-prime mortgage” crisis and was witnessed by many economies all around the world. Due to the origination of this particular crisis relating with “sub-prime mortgage”, the rate of interests were raised and the net worth in the housing market declined. As a result, with the increase in the rate of interests and fall in the value of the housing, there was a sharp jump in non repayment and foreclosures of credits. Rangarajan (2009) also noted that there lies a mutual suspect among the monetary institutions that severely led to freezing up of several markets which also include the interbank sector. It was because of the emergence of worldwide economic crisis that the various market risks, FDI flows, lending of bank flows as well as export volumes were recorded to be negative during this time period. As a result, with the downturn in the economic performances through worldwide economic crisis, many countries experienced substantial declines, especially in their business expansion and also in their credit growth (Rangarajan, 2009). In connection with the worldwide economic crisis, it has been noted in Niinimaki (2009), that several subprime banks were significantly collapsing, particularly in USA. The subprime banks symbolises a faster emerging division of the mortgage market in which loans were provided to certain borrowers who later failed to comply with the requirements of credit facilities in the mortgage market. Another significant cause of the worldwide economic crisis is the reduction in the property prices, banking methods and exchange rates (Ninnimaki, 2009). Thus, it can be stated that the aspect of “sub-prime mortgage” and subprime banks among others were the significant causes or reasons for the emergence of worldwide economic crisis that ultimately shattered almost all the monetary institutions in the global market to a certain extent. Another noteworthy cause of the emergence of worldwide economic crisis was due to the structural fragility within the financial markets. The aspect of structural fragility eventually weakened the financial system or markets, lawful infrastructure and also in the governance of financial institutions. Thus, the various effects resulting from the structural fragility relating with the weaknesses that prevail in the financial system or markets, lawful infrastructure and also in the governance of financial institutions, played a major role to ultimately lead towards the worldwide economic crisis by a considerable extent (Gramlich & Oet, 2011). According to Duffie (2010), the failure of banks, especially in the market of derivatives and securities, was one of the foremost causes of worldwide economic crisis. It is in this context that the historical insolvency of Lehman Brothers played a major role in developing the financial and also the worldwide monetary market into a difficult pathway. The bankruptcy of the Lehman Brothers also created significant impact upon the worldwide economy, worldwide monetary system and also for the central banks in various financial markets in the global forefront. Duffie (2010) also noted that the emergence of the worldwide economic crisis possessed a considerable effect upon the central banks as well as the economic regulatory systems to a certain extent. In this connection, during the year 2008-2009, it was notified in Duffie (2010) that certain inequalities exist between the approaches of “savings-investment”. In this regards, he mentioned that the inequality of “savings-investment” approach is partly the result of export oriented growth strategies which have been performed by few of the developing financial markets. The deficiency in the rate of exchange adjustments can also be viewed as an extra part of this important issue of the approach of “savings-investment” (Duffie, 2010). In terms of the universal monetary crisis, as stated by Heffernan (2005), the effective contributions made by several banks may diminish significantly or the banks would disappear due to the emergence of latest global financial crisis. Heffernan (2005) also argued that the financial systems generally grow from three stages. The first stage is bank oriented in which external finance is increased through bank loans which ultimately turns into savings. The second stage includes market oriented which signifies the financial markets as a basis of external finance comprising both financial as well as non-financial sectors. Finally, the third phase mainly deals with the various actions related with asset management which becomes more important for the banks rather than its other various core functions. However, collectively, after acquiring a brief idea regarding the different stages of the financial systems, it can be stated that the banks act as major financial mediators into the international financial system. Moreover, along with the banks, the interest that generates from making depositories into the banks is duly considered as a chief source of revenue (Heffernan, 2005). According to Heffernan (2005), one of the noteworthy reasons for the emergence of the worldwide economic crisis is generally related with the banks especially considering the aspects of asset management, financial mediators, bank interests and different stages of modern banking. It has been noted in Hempel & Simonson (1999) that the aspects relating with credit facilities affect every individual as well as businesses causing a substantial impact over the world economy on the whole. Therefore, the considerable aspect of credit facilities or credit crisis is regarded as one of the major causes of the worldwide economic crisis. According to Hempel & Simonson (1999), the various issues or the difficulties that are related with the aspect of credit crisis include the difficulties relating with mortgage defaults as well as decreasing home prices in the financial and regional markets. Another outcome, observed by Hempel & Simonson (1999) which signified the monetary crisis brought a dramatic change in the overall structure and the procedure of US in the banking environments. In this regard, the dramatic changes in the banking procedures were examined by the foreign governments and the policy creators. During the investigation, the policy creators as well as the foreign governments visualized that there lies a substantial large budget deficiency, greater trade deficiencies, weakening of the monetary institutions diminishing the value of the international markets. These sorts of various deficiencies relating with the budget, trading businesses, financial institutions and the international markets were also observed in other countries apart from US. Along with the above discussed deficiencies, the countries also faced various problems relating with loan facilities that resulted in significant losses and that of diminishing bank capital (Hempel & Simonson, 1999). According to International Labour Organization (2009), the other reason for the emergence of the worldwide economic crisis was the large invasion of money into the financial system which eventually extended the supply of available funds that are readily available for loans and investments. Taking into concern the various inadequacies that prevail especially in the regulatory framework of the government economic initiatives or programs, the investors and the market participants acquired a large amount of riskier loans for the purpose of rejuvenating the subprime housing market and refinancing mortgages. These acquired riskier loans that are performed by the investors and the market participants contributed a certain proportion towards the rise of worldwide economic crisis (International Labour Organization, 2009). International Labour Organization (2009) also observed that another major reason for the rise of economic worldwide crisis was the immediate expansion of income inequalities within the countries. International Labour Organization (2009) also stated that the income inequalities were made feasible by regulating the fiscal performances that permitted enormous liability accumulation and focused on short term dealings rather than long term investments in the worldwide monetary market. 3.0. Conclusion With reference to the above discussion, it can be stated that there were various reasons which contributed to the rise of the recent global financial crisis. It is firmly believed that the result of the global economic crisis possess a considerable effect upon a particular economy. Among the various causes for the emergence of global economic crisis, major disturbances into the international monetary markets along with the different economic institutions contributed significantly in raising the impact of economic crisis. In order to cope up with the economic crisis to a certain extent, there lay certain major areas which require utmost importance. In terms of the recent global economic crisis, the major areas that require utmost importance include assisting as well as supporting the domestic growth drivers and raising investments that would help towards the development of monetary institutions to a certain extent. Moreover, the other areas include the positive roles and the functions of the banks such as subprime banks and central banks among others ensuring sufficient flows of development aid. References Bessis, J., 2011. Risk Management in Banking. John Wiley and Sons. Duffie, D., 2010. How Big Banks Fail and What To Do About It. Princeton University Press. Gramlich, D & Oet, M. V., 2011. The Structural Fragility of Financial Systems: Analysis and Modeling Implications for Early Warning Systems. Journal of Risk Finance, Vol. 12, Iss. 4. Hempel, G. H & Simonson, D. G., 1999. Bank Management: Text and Cases. John Wiley & Sons. International Labour Organization, 2009. The Crisis: Causes and Transmission Mechanisms. The Financial and Economic Crisis: A Decent Work Response. [Online] Available at: http://www.ilo.org/public/english/bureau/inst/download/tackling.pdf [Accessed March 15, 2012]. Jickling, M., 2008. Summary. Adverting Financial Crisis. [Online] Available at: http://fpc.state.gov/documents/organization/103688.pdf [Accessed March 15, 2012]. Heffernan, S., 2005. Modern Banking. John Wiley & Sons. Ninnimaki, J. P., 2009. Does Collateral Fuel Moral Hazard In Banking? Introduction. [Online] Available at: http://ethesis.helsinki.fi/julkaisut/eri/hecer/disc/231/doescoll.pdf [Accessed March 15, 2012]. Shah, A., 2010. Global Issues. Global Financial Crisis. [Online] Available at: http://www.globalissues.org/article/768/global-financial-crisis [Accessed March 15, 2012]. Read More