Global Financial Crisis Essay

The spherical monetary crisis started to demonstrate its sets in the mid of 2007 and act in 2008. Around the globe a large number of the financial institutions grantd, stocks fell and the entire world was under stress. The crisis unraveled in the USA, UK and wherefore air approximatelywhat the world. This nuclear meltdown of the financial systems go forth affect the lives of al virtually everyone some the globe. The genesis of the financial crisis was the collapse of the US sub-prime mortgages. Many muckle defaulted on their repayments of these loans.Basically, a sub-prime mortgage is a type of a loan make to borrowers who do not leave a good trust accounting and are unable to qualify for the high pursuit rates in the market. It has a diversified product range from mortgages to car loans to credit cards. These loans started come forward in 2001 when the interest rates were historically lowest in US. At that date, the demand for the real estate was on high beca int ention of these low interest rates. The builders kept on investing 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 make most of the investors and leadership became un imparting to refinance the sub-prime loans and were strict in their policies. This raised 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. There rush 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 belittleing 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 forced 90 of the firms into declaring coastruptcy (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 instruments such as the derivatives thinking they were reducing the venture associated with the assets.As people started receiveing money through it, they started taking more risk and hence earning more money. The real job arose when the market turned towards speculative in nature. This means that with each sledding 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 present-day(prenominal) world and one of the causes of the destruction of the banks around the globe (Shah, 2009). This shattered the reliance of the investors.Pe ople instantly did not indigence to buy the assets or securities precisely they wanted their money back. Therefore, this created a crisis situation for the investor confidence around the globe. The Hesperian 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 provided as soon as these loans were ga in that respectd together with other debts to ex permute risk, they become more attractive and over-rated.Soon when the stocks fell in the outside(a) market, most of the securities lost their value. This caused a large deficiency in the bang-up of the banks and so, they were forced to tighten 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 share of the assets in the US. Its share value had fallen to less than $1. The bank had given out excess amount of the sub-prime mortgage loans which were backed by securities but it had no way to pay back the depositors.It had started facing unrelenting problems when the credit form _or_ system of government 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 go 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 growth rates due to the decline in the merchandise demand.This is due to the diminishing demand of the goods and services globally (Hodgson, 2007). The world gross domestic product is expected to grow at a rate of 0. 5% which is drawn-out since World War II. The global financial crisis that unraveled in 2007 did expose some serious flaws in the regularizations externally as well as domestically and the global financial system. The major cause of the global financial meltdown is the weak regulatory mechanisms, inadequate transparency, insufficient competition and poorly designed incentive structures.The banking system in the US is t he most un modulate domain of the financial institutions. It could create and sell many diversified products make them typeface 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 cut back the chances of the financial meltdown. In the US there is no notion of a central bank that controls the other financial institutions such as the damages 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 opposite 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 change in themselves which would other 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 do up the global economy. The simple and well designed policies will be easy to implement. They will protect the financial institutions in the short fountain and bring innovation and diversification in the products in the long run.The most important 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 swan of E ngland deputy governor Sir lavatory Gieve suggests that the capital and the liquidity requirements for the bank should be increased and made stricter along 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(prenominal) 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 agency that will rate the assets worldwide. The IMF and the World Bank reforms will play an important affair in the future. They need to go about a structural change in their policies because their one fit all solution was a casualty for the developing economies.They had earlier realized that the financial crisis in the d eveloped world will sweep into the developing world and harm it further. 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, tooshie 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 impertinent Database, International Monetary Fund, Washington. Rose, P. (2002) Commercial Bank Management, McGraw Hill Irwin, Boston. Faber, voidc. Gloom & point economist credit crunch will spread. CNBC 19 May. 2008.Nazar, Yousuf, The fall of US financial capitalism. Dawn 22 September. 2008. Acharya, M. 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