Analysis on the Up-to-date Money Disaster as well as the Banking Industry
The existing economical crisis started as section on the world liquidity crunch that transpired in between 2007 and 2008. It is really thought that the crisis experienced been precipitated from the detailed panic generated via financial asset selling coupled using a immense deleveraging inside finance establishments in the huge economies (Merrouche & Nier’, 2010). The collapse and exit for the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by huge banking institutions in Europe as well as the United States has been associated with the worldwide personal disaster. This paper will seeks to analyze how the global monetary crisis came to be and its relation with the banking industry.
Causes with the money Crisis
The occurrence belonging to the intercontinental fiscal crisis is said to have had multiple causes with the key contributors being the money institutions and therefore the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced around the years prior to the personal crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and finance establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.
The risky mortgages were passed on to financial engineers inside big financial institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was which the property rates in America would rise in future. However, the nationwide slump on 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 with the banking establishments had to reduce their lending into the property markets. The decline in lending caused a decline of prices inside the property market and as such most borrowers who experienced speculated on future rise in prices had to sell off their assets to repay the loans an essay writers aspect that resulted into a bubble burst. The banking establishments panicked when this happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency with the central banks in terms of regulating the level of risk taking inside economic markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the crisis stimulated the build-up of money imbalances which led to an economic recession. In addition to this, the failure from 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 economical crisis.
The far reaching effects the finance crisis caused to the global economy especially around the banking sector after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul of the international finance markets in terms of its mortgage and securities orientation need to be instituted to avert any future money crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending around the banking market place which would cushion against economic recessions caused by rising interest rates.