Different causes of the 2008 financial crisis finance essay

Another round of currency crises took place in Asia in — Recession and Depression economics Negative GDP growth lasting two or more quarters is called a recession. It is quite annoying to hear the arguments of the public about the shallow report. Therefore, leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy.

Banks created too much money… Every time a bank makes a loan, new money is created.

Financial crisis

There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. Many on the Wall Street foresaw this and alerted the government institution.

Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw too.

Financial crisis 2008

For example, someone who thinks other investors want to buy lots of Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen too. While the epicene of the financial crisis was in amerce due to widespread failures of the major institutions, it is interesting to note that the failure in financial regulation, and the dramatic breakdown in corporate governance and poor policies were the main causes of the unstable economic situation in the country Hennessey, et al,pp.

The average degree of leverage in the economy often rises prior to a financial crisis. Since banks lend out most of the cash they receive in deposits see fractional-reserve bankingit is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run renders the bank insolvent, causing customers to lose their deposits, to the extent that they are not covered by deposit insurance.

Strategic complementarity and Self-fulfilling prophecy It is often observed that successful investment requires each investor in a financial market to guess what other investors will do.

However, although they reduce the amount of new loans they make, the public still have to keep up repayments on the debts they already have.

What Caused the Financial Crisis?

So when the economy is doing badly, banks prefer to limit their lending. Also, if the first investors in a new class of assets for example, stock in "dot com" companies profit from rising asset values as other investors learn about the innovation in our example, as others learn about the potential of the Internetthen still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits.

Some economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession.

In the run up to the financial crisis, banks created huge sums of new money by making loans. The country currency was already facing deregulation because the credit crisis had already built up over many years the country housing market was really growing.

In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis.

As the Bank of England describes: However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

While the Failures of risk management has been considered as a. One important example is the Great Depressionwhich was preceded in many countries by bank runs and stock market crashes. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.

If there is a bubble, there is also a risk of a crash in asset prices: The foreclosure found many ill prepared for any eventuality as they struggled to pay their mortgage. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation.

In addition, some scholars have argued that financial institutions can contribute to fragility by hiding leverage, and thereby contributing to underpricing of risk. The housing market showed the same trends in a number of major economics such that any decline in one economy could be reflected in the US economy.

When a country fails to pay back its sovereign debtthis is called a sovereign default. A downward spiral thus begins and the economy tips into recession.

While there were a number of risks that could have been avoided or better still mitigated, it was due to the overall reluctance to make appropriate decision and implemented strategic economic policies to save the country from such an economic slump. The Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds.

The Panic of and Long Depression followed. However, inthe credit bubble busted and the housing or real estate bubble began. In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of and the bank panics of the s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, [12] a position supported by Ben Bernanke.“The financial crisis of to occurred because we failed to constrain the financial system’s creation of private credit and money.” Lord Adair Turner, speaking as chair of the Financial Services Authority, 6th February, This paper will describe the nature, causes and probable solutions of the major financial crisis experienced in the United States between and The paper also addresses the fine details of the crisis highlighting on some issues such as; questions of who was responsible for the undesirable financial condition.

Aug 08,  · Argumentative Essay on the Economic Crisis While the epicene of the financial crisis was in amerce due to widespread failures of the major institutions, it is interesting to note that the failure in financial regulation, and the dramatic breakdown in corporate governance and poor policies were the main causes of the unstable.

A history of finance in five crises, from to As the impact of the crisis of subsides, leaving its legacy of unemployment and.

Financial crisis According to the specialists, there are many reasons for this global financial crisis. We try to focus some prime reasons behind this crisis, which are as follows- Subprime mortgage crisis- The Subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking.

Leverage, which means borrowing to finance investments, A noted survey of financial crises is This Time is Different: Eight Centuries of Financial Folly (Reinhart & Rogoff ), An initial inquiry into the causes of the financial crisis’ () 9(1) Journal of Corporate Law Studies 1.

Different causes of the 2008 financial crisis finance essay
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