Global Financial Crisis Essay Example for Free

Global Financial Crisis Es pleadThe global financial crisis started to demonstrate its effects in the mid of 2007 and continued in 2008. Around the world a large number of the financial institutions collapsed, stocks fell and the entire world was chthonic stress. The crisis unraveled in the USA, UK and whence spread well-nigh the world. This meltdown of the financial systems result affect the lives of virtually everyone around the land. The genesis of the financial crisis was the collapse of the US sub-prime owes. Many people defaulted on their re indemnifyments of these loans. Basically, a sub-prime mortgage is a type of a loan made to borrowers who do not have a good belief history and ar unable to qualify for the high concern rates in the market. It has a diversified product range from mortgages to car loans to credit cards. These loans started out in 2001 when the interest rates were historically lowest in US. At that time, the demand for the real estate was on high beca handling of these low interest rates. The builders kept on investment funds in the construction of the houses even though the demand for property saw a decline after a while.Due to this huge boom, the property became so over valued that it saw the worse decline in prices in 2006 (University of Iowa, 2008). This made most of the investors and leaders became unwilling to refinance the sub-prime loans and were strict in their policies. This embossed the interest payments which some of the investors were unable to afford. Hence more and more people stared defaulting. Around 3. 6 million home owners lost their homes due to the mortgage defaults. thither have been around $100 billion worth of Sub-prime mortgage leans defaults from the low-credit worth people.At the same time, the world saw the world stock prices falling in most of the places which made large number hedge funds insignificant. This collapse in demand for the securities which were backing the sub-prime mortgages force d 90 of the firms into declaring bankruptcy (Acharya, 2007). These crises in the sub-prime mortgage and the declining world stock prices led to the global financial crisis in July 2007. Investors had also over indulged themselves in the sophisticated financial cats-paws such as the derivatives thinking they were reducing the risk associated with the assets.As people started earning money through it, they started taking more risk and hence earning more money. The real problem arose when the market turned towards tough in nature. This means that with each loss the investor went with more risk to cover up the earlier losses and earn a higher profit. The financial instrument that the bank expected to will reduce its risk created the greatest problems for it. This is how the derivatives became a problem in the current world and one of the causes of the destruction of the banks around the globe (Shah, 2009). This shattered the confidence of the investors.People now did not want to buy the assets or securities unless they wanted their money back. Therefore, this created a crisis situation for the investor confidence around the globe. The western economies were also affected by the process of securitization. It is a process by which the financial assets are backed by the real assets through the use of instruments such as the derivatives. The sub-prime mortgages were risky and under rated when compared in isolation but as soon as these loans were gathered together with other debts to diversify risk, they sustain more winsome and over-rated.Soon when the stocks fell in the international market, most of the securities lost their value. This caused a large deficiency in the capital of the banks and therefore, they were forced to melt off their credit policies around the world. For example Lehman Brothers filed for bankruptcy on September 15, 2008. It was the largest bankruptcy filed in the US history because it held a major partake of the assets in the US. Its sha re value had fallen to less(prenominal) than $1. The bank had given out excess amount of the sub-prime mortgage loans which were backed by securities but it had no bureau to pay back the depositors.It had started facing severe problems when the credit policy was tightened across the world. Sine they were refused to be bailed out, they had filed for bankruptcy with the US government. This had a direct effect on almost all the banks in the US and abroad that were holding the assets of the Lehman Brothers and hence this caused a ripple effect globally. The whole world was affected with the sub-prime mortgage defaults because the world is a global village now and all the businesses in it are inter-related with each other.The credit housing market had indirectly affected all the other markets around the globe. The lenders developed strict policies for the credit facilities and hence decreasing the consumer spending. Demand for the goods and services decreases, profits declines and hence less investment and production. This leads to the layoffs, less household income and therefore less consumer spending. Due to the financial crisis, it is estimated that approximately 80 million people could be forced to live in poverty. The developing economies will be experiencing slow increase rates due to the decline in the export demand.This is due to the diminishing demand of the goods and services globally (Hodgson, 2007). The world GDP is expected to grow at a rate of 0. 5% which is slowest since World War II. The global financial crisis that unraveled in 2007 did expose some serious flaws in the regulations internationally as well as domestically and the global financial system. The major cause of the global financial meltdown is the weak regulatory mechanisms, infair to middling transparency, insufficient contention and poorly designed incentive structures.The banking system in the US is the most unregulated sector of the financial institutions. It could create and sell m any diversified products do them look secure and attractive. When the loans were being given out, there was very little risk analysis being done and that also with the imprecise and inaccurate data and models. The strict regulation of the sub-prime mortgage and low interest loans would have reduced the chances of the financial meltdown. In the US there is no notion of a profound bank that controls the other financial institutions such as the insurance companies, mortgage banks and banks.The US federal government preferred self regulation of the financial institutions under the rule of Chairman Alan Greenspan. This provided for the relaxed and simple environment where different institutions came together to produce and flood the market with sophisticated and diversified products and made them look very attractive and safe. The investors invested in these banks as they did not have the right information about the negative consequences which were never released. This type of policy does result in growth but at the same time it also results in mismanagement and less control.Most of the firms present in the world were resistant to bring any diversity in themselves which would otherwise have brought strong competition in the market. The people have now called for better regulation and reforms for the financial sector both internationally and domestically. They want the developing nations to have some voice in the formation of these policies and shaping up the global economy. The simple and well designed policies will be easy to implement. They will protect the financial institutions in the short run and bring innovation and diversification in the products in the long run.The most grievous is that the banking sector in the USA needs to be regulated heavily by a central bank. They should be regulated in a way that they have the minimum required amount of deposits. The commit of England deputy governor Sir John Gieve suggests that the capital and the liquidity r equirements for the bank should be increased and made stricter on with the tough restraints on the building up of the risk. At the same time, the loans should be made difficult to get in good times. These banks need to provide the investors with the adequate information when they are making their decisions.The rating agencies in USA as well as around the world must have stricter reforms and should be heavily regulated so that they properly rate the assets using appropriate models and data. It is also suggestive that there should be a single international rating style that will rate the assets worldwide. The IMF and the World Bank reforms will play an important role in the future. They need to go about a structural substitute in their policies because their one fit all solution was a disaster for the developing economies.They had earlier realized that the financial crisis in the developed world will sweep into the developing world and harm it get on. Even then they were unable to find a clear solution. Therefore, they need to change their policies and must include the say of the poorer nation while making the new policies. The international bodies and the banks need to be more transparent in their operations and the enforcement of policies so that there no further objections rose to it (Shah, 2009).References Shiller, R. J. (2008) The Sub-prime Solution, Princeton University Press.Fraser, D. , Gup, B. , and J. Kolari (2007) Commercial Banking The management of risk, John Wiley Sons, Australia. Heffernan, S. (2005) Modern Banking, John Wiley Sons, Chichester, England. Koch, T. and S. Scott MacDonald (2003) Bank Management, Thomson South Western, OH45040, USA. Laeven, L. and F. Valencia (2008) Systemic Banking Crises A New Database, International Monetary Fund, Washington. Rose, P. (2002) Commercial Bank Management, McGraw Hill Irwin, Boston. Faber, plunderc. Gloom Doom economist credit crepitate will spread. CNBC 19 May. 2008.Nazar, Yousuf, The fall of US financial capitalism. Dawn 22 September. 2008. Acharya, M. 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