Analysis from the Present-day Economic Crisis and also the Banking Industry
The current monetary crisis commenced as element within the world liquidity crunch that happened between 2007 and 2008. It is thought that the crisis experienced been precipitated from the wide-ranging panic produced thru economic asset promoting coupled along with a enormous deleveraging around the financial establishments from the key 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 establishments in Europe in addition to the United States has been associated with the global economical disaster. This paper will seeks to analyze how the global economical disaster came to be and its relation with the banking market place.
Causes with the personal Crisis
The occurrence within the international economic disaster is said to have experienced multiple causes with the major contributors being the finance establishments in addition to the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced on the years prior to the economical 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 finance engineers inside the big economic establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump in 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 from the banking establishments had to reduce their lending into the property markets. The decline in lending caused a decline of prices around the property market and as such most borrowers who experienced 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 happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency from the central banks in terms of regulating the level of risk taking inside of the financial markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the disaster stimulated the build-up of money imbalances which led to an economic recession. In addition to this, the failure with 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 personal disaster.
The far reaching effects that the financial crisis caused to the worldwide economy especially in the banking community after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul for the international personal markets in terms of its mortgage and securities orientation need to be instituted to avert any future economic disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending in the banking marketplace which would cushion against economic recessions caused by rising interest rates.
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