Analysis from the Current Money Disaster plus the Banking Industry
The existing money disaster began as element with the world liquidity crunch that transpired among 2007 and 2008. Its believed that the disaster experienced been precipitated from the in depth stress generated through economical asset advertising coupled accompanied by a gigantic deleveraging inside the financial institutions on the main economies (Merrouche & Nier’, 2010). The collapse and exit within the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by key banking institutions in Europe as well as the United States has been associated with the global monetary disaster. This paper will seeks to analyze how the global fiscal disaster came to be and its relation with the banking market place.
Causes for the financial Crisis
The occurrence from the world wide financial crisis is said to have had multiple causes with the most important contributors being the monetary institutions as well as the central regulating authorities. The booming credit markets and increased appetite of risk http://courseworkservice.com/ coupled with lower interest rates that had been experienced inside years prior to the financial crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economical institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.
The risky mortgages were passed on to economic engineers while in the big monetary institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was that the property rates in America would rise in future. However, the nationwide slump while in the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most of your banking institutions had to reduce their lending into the property markets. The decline in lending caused a decline of prices while in the property market and as such most borrowers who had speculated on future rise in prices had to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking institutions panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency from the central banks in terms of regulating the level of risk taking during the fiscal markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the crisis stimulated the build-up of personal imbalances which led to an economic recession. In addition to this, the failure by the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the fiscal disaster.
The far reaching effects which the finance disaster caused to the worldwide economy especially inside the banking market place after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul on the international financial markets in terms of its mortgage and securities orientation need to be instituted to avert any future economical disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending on the banking business which would cushion against economic recessions caused by rising interest rates.