Analysis with the Present Economic Crisis plus the Banking Industry
The active personal crisis commenced as half within the world-wide liquidity crunch that happened between 2007 and 2008. It is usually thought that the disaster had been precipitated from the comprehensive panic generated as a result of money asset selling coupled that has a large deleveraging in the fiscal establishments within the leading economies (Merrouche & Nier’, 2010). The collapse and exit with the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by principal banking institutions in Europe together with the United States has been associated with the global fiscal crisis. This paper will seeks to analyze how the worldwide personal disaster came to be and its relation with the banking business.
Causes within the financial Crisis
The occurrence on the international fiscal crisis is said to have experienced multiple causes with the main contributors being the fiscal establishments as well as central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced inside years prior to the personal crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and financial institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.
The risky mortgages were passed on to financial engineers from the big monetary establishments 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 during 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 belonging to the banking institutions had to reduce their lending into the property markets. The decline in lending caused a decline of prices during the property market and as such most borrowers who had speculated on future rise in prices experienced to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking institutions panicked when this transpired which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency by the central banks in terms of regulating the level of risk taking inside the financial 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 courseworkservice.com/coursework-help the build-up of finance imbalances which led to an economic recession. In addition to this, the failure because of 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 money crisis.
The far reaching effects that the fiscal disaster caused to the worldwide economy especially within the banking marketplace after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul from the international monetary 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 inside of the banking industry which would cushion against economic recessions caused by rising interest rates.