The Financial Crisis Causes Finance Essay
Is there an end in sight to the financial crisis? To answer this question the financial crisis causes should be defined and analyzed. Financial crisis can be defined as a sudden drop after a steady growth in market. Because the economic growth and market is very volatile this becomes the central of the financial crisis. When the investors predict the market and invests in any sector, due to the market instability, the demand of that investment may decrease and their value of the estimation substantially diminishes. This trend follows a period and significantly investors' huge investment does not return the expected revenue and this in turn affects their loan payment. They abruptly stop further investments and they begin to sell assets. (Aiginger,K. 2009).
The financial crisis that started on 2007 is the second deepest crisis since the Great Depression of the 1030â€™s and the most destructive in terms of economics. Despite this fact, there is still and optimistic pathway to put an end to the current financial crisis.
THE FINANCIAL CRISIS CAUSES
The causes of the financial crisis can be categorized under two main categories, political and economic.
The globalization is one of the biggest political reasons. Globalization made the word more integrated and connected and lead to financial crisis started on US and then get propagated to Europe and the rest of the world. The second main political reason is the prolonged wars in Iraq and Afghanistan following by the instability in the middle-east from what is called the Arab spring revolutions.
Economic reasons list is a big list starting from bad governance, policy and regulation enforcement within the US market and ends with companies and individuals behavior. For example highly optimistic organizations and individuals are the main cause for the crisis during the preceding economic growth epoch. They tended to believe that the general market growth will persists forever without any drop. This optimism makes everyone to borrow a huge quantity of assets and invest them in homes, luxury objects and expansion of their business. Another cause is executives in banking sector who want to gain short term financial benefit. They are biased towards lending out as much money as possible to the borrowers, regardless of the consequences for the bank and the borrowers. When the supply decreased, the demand too got reduced. Hinder all the financial institution which lends out more money to the borrowers who pays back when they are comfortable (Carmassi et al, 2009).
The collapse of both the US sub-prime mortgage market and the housing boom turnaround had a ripple effect around the globe. Some goods and tools have become so difficult and abnormal, and things start to disentangle. The trust in the whole system started to get diminished. The origin of this present state is due to the overloading of lending money by banks which permitted different groups to buy expensive assets that they could not afford. This was welcomed and encouraged by the politicians and was sold by the middle men in a smart way. This created the trigger for the current scenario (Cooper,G. 2008) .
POSSIABLE SOLUTIONS TO PUT AN END
The governments should play a central role, interfere, lay and enforce proper regulations to set clear criteria that must be satisfied during the money lending process. Rewards of the bank executives directly for the amount of mortgages they establish should be forbidden by the banks.
In order to tackle future recession, the UK government needs to follow some regulations. The economic policy should support the total demand by increasing the public demand or by providing inducements to encourage private expenditure (Aiginger,K. 2009).
Monetary policy should be changed to increase the money supply which has reduced interest rates. Fiscal policy is to be followed to improve the structure of taxation. It includes national and international stimulus packages. The European model to be followed (Aiginger,K. 2009), it includes strategic spending i.e., to invest in future technologies, education, research and development and green technology.
Government and financial institutions should try to limit the scam and increase the capital requirements for banks .They also should follow the regulations and it would be better to hold sufficient funds to cover their normal operations. In order to reduce the exposure to loss, the bank should take over all the risks and also increase their transparency; their ethics are to be modified accordingly and also to be included in the asset definition. It is very important that the current land rationing policies should be phased out as soon as possible. Capital requirements are to be set fairly so that it cannot be evaded by the mediators to raise liquidity (Minsky, H. 2008) .The simple way of doing it is to set capital requirements with reference to total assets without any exceptions or workarounds.
The main cause for the delude information for investors and obstinate incentives are the assets with maximum risk. (Gros, D. 2009). These assets should be avoided to maintain the economy. The government should provide guarantees by offering small pensions and loans and also it should fight poverty by employment. The youth unemployment problem can be addressed by training and making informal jobs more professional. By increasing the alternatives the supply and demand stability can be maintained. These aforementioned strategies should be followed by governments in order to maintain the stability and also to prevent the arrival of the current scenario (Greenspan ,A. 2009).
It is important that the optimism and complacency behaviors should be discarded and follow the regulations, enforce polices and also the remedies as mentioned above to restore the trust and balance in the system.
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