Causes of the Financial Crisis - Essay Example

Many securities that were attached to the US property prices fell drastically as well which caused problems in financial institutions globally. The initial reason why people started buying as government encouraged ownership of homes and gave people better and easier access to loans and they over valued the bundled mortgages because they perceived that the prices of property would continue to rise. Trade practices on the open market were conducted that seemed underhand and questionable and there was a lack of capital in insurance companies and banks.

As a result, bank solvency on the global market fell as well and securities held by foreign banks also suffered. A credit tightening policy and a decrease in imports was noticed. Governments tried to boost the economy by injecting money in the economy and bailout packages. The US managed to get out by 2009 however places like UK due to their strict measures of increasing taxes actually slid further into this recession. The crisis could also have occurred due to the presence of a wide base of financial products that were risky to acquire and hold.

Also there were interest rate conflicts, and lack of regulators in credit rating agencies. A failure to retrace the ownership or provenance or properties and stocks etc. was also one of the reasons the recession occurred and then was so hard to get out of. Some believe that the recession was a phenomenon that arose when the Maastricht Treaty was signed. The debt of the public was agreed about less than equal to 3% of the GDP but it didn’t hold. The euro was to be doomed as soon as it got started or even before because Greece and Italy helped the euro classify as the currency for the euro zone.

The decision making at that point were the worst. France has been under debt since 2008 and the situation has worsened over the years and one of their banks along with their criminal reputation is also under massive debt issues and still asked to fund neighboring countries however it cannot help the bankrupt countries since it is in a fix of its own. Germany fell under a similar situation. Sovereign banks are wrongly being separated from bank debt when the government clearly controls everything a bank does and dictates to them what is to be done.

The euro zone is at stake. Credit default swaps also rose in all regions and in 2011 were being traded at 180 when they were being traded at 80 in 2008. In Brazil as well they went up to 152 from 35, and this was because of the crisis that started in Europe. UK as well was cutting loans to its business by 30%. (Gupta, 2009) Banks were also pooling in their loans and giving risky loans to others. Securitization came about in the 20th century as well because loans would take ages being stuck in banks.

Rating agencies were paid for giving good rating so people bought products even though they were not good. Initiated in Wall Street banks and other financial institutions were adopting measures that they were not necessarily good at. Banks were borrowing more and more money to give out loans and bad loans were incurred. Lehman brothers got into the mortgage market, buying mortgages so that they could sell them after securitizing them.