Causes of the Financial Crisis

Causes of the Financial CrisisIntroductionFinancial crisis occurs when in that respect is instability in the finance systems which pose danger to the economic, political, social and international affairs leading to decisive changes. It depart reveal perspectives on the functioning situation of m superstartary economies. Financial crisis does non affect only the country itself it is like a contagious disease that spreads to neighbouring environments and across to its partners especially in this modern time where the world is interconnected. It is monetary misdirection which leads quickly to economic destruction, diminishes individual and national wealth, lost growth, etc.It is an interruption to monetary markets which is connected with falling asset prices that will result in the inability to pay debts among debtors and intermediaries that spread out through the pecuniary system. By this happening it will cause disorder to the f utter of markets capacity to pump capital in sp ite of appearance the economy.On the basis of international crisis, this commotion will overflow into national borders, causing disorder to the markets ability to allot capital internationally. When this happens, no one takes blame or at least will admit that they fore take in it coming. It causes a lot of violent changes around the country and across the glob with devastating consequences.On the aspect of Private and individuality this will result to unemployment population will not be able to find snip, loss of properties, families will lose their homes to foreclosure process and many will be in arrears on their mortgage payments. Household wealth worth a lot of billions of Euros will disappear, breeding savings, retirement accounts all will go d bear the drain.Business and commerce large and small bloodlinees will feel the sting of the economic recession. Manufacturing will dec plication, planetary trade will diminish, and some will file for bankruptcy and be forced out of business (Angelides and Thomas, 2011)People will be find angry close what is happening. Some people who have worked hard all their lives, obeyed the law and played by the rule will probably find themselves out of work and about(predicate) to lose their family homes will not know what the future has in store for them.The segment who is mostly affected by any financial crisis is the private people and the communities. Businesses will move out of communities, banks will stop lending money there will be shortage of cash flow, consumers reduce their spending and very much everything is at a standstill. The after effects/impacts of the crisis stays on and will be felt for decades to come, and rebuilding the economy takes a lot of hard work and dedicated efforts.In this research paper I will discourse the causes of financial crisis what atomic number 18 the reasons wherefore from time to time there is an economic recession, and recite why certain financial crisis are contagious. I w ill use the 2008 financial crisis as case study to illustrate my answer, and finally conclusion.Causes of financial crisisThe causes of financial crisis could be a slim complicated and not a very straight forward explanation could be given. It is a crisis on one feed that could be blamed on governing body action, and on the other hand, it could be blamed on government inaction (is not doing enough) only the bottom line is that it is a problem cause by human beings. It is not caused by nature or computer error. Financial crisis have occurred dozens of times since the 17th century (The Economist, Jan., 2009). Understanding financial crisis is crucial in avoiding them, but that leaves the question why financial institutions and their agencies/bank regulators never see the possibility of crisis coming? The crisis that occurred in 2008 which was the most fresh and will not most probably be the last was the most severe and the most world(a) since the Great Depression of the 1930s.I must not fail to point out where this crisis started from or its origin. Financial crisis is al ways associated with the financial systems of global powers, and the one that happened in 2008 was no exception. Since the collapse of Soviet Union, join States has been the dominant superpower and while momentarily being the most influential and extremely powerful nation was full of assurance that economic relaxation behavior and the rapid growth of communications technology would give the world economic expansion.The move towards integrated global economy has been instrumental in the amassing of wealth by a few individuals which has created inequality. In the process of the government trying to bring pig the gap between the haves and have nots in the US some of the policies gave rise to the financial crisis.We human beings have always been obsessed with money, and have the excessive desire to acquire more of it. And generally people flow to spend more than they have banks are willi ng to give loans and these loans some will be paid back and some will not be paid back, by so doing this is creating huge debts that have the potentiality to cause a dramatic effect to the financial set up of the country.This is part of the reasons why from time to time Central banks pumps money into the financial system so as to have enough money in circulation.Before the start of the crisis financial institutions (mortgage brokers and bankers) were high spirited and excited about the financial bubbles that they became very optimistic and began to take huge financial finds. The professionals put in complaint to manage globe finance tend to ignore warnings and fail to ask questions, and not able to manage evolving risks.Failures in the financial regulation and the lack for proper supervision When it comes to finance, there must be laws and rules put in say to govern the procedures. These principles must be adhered to irrespective of personality or circumstances. Financial expert s put in charge of all financial institutions must discharge their duties effectively and professionally by acknowledging that they are there foremost to protect public money and to regulate the financial system if possible overhaul them from time to time.Financial institutions should not regulate themselves. When financial institutions regulate themselves, security protection that ensures safety and avoid sudden and general disaster of public money could be removed or not followed strictly. With this approach trillions of dollars will be vulnerable. By governments allowing financial firms the choice to select their own preferred regulators to work with always results in the supervising being weak. In the financial system, regulators have lots of powers in different areas to protect it (the financial system) but out of their own reasons they do not do so, that is oversight.The collapse of the housing bubble The financial crisis of 2008 which started in the US as the result of a bu ckswing in real res publica values caused primarily by rising defaults in subprime mortgages. The government encouraged financial institutions to devote mortgage loans available to low income earners and the underprivileged in their various communities under the Community Re investing Act (CRA) in an effort to bridge racial equality and increasing homeownership by lending one hundred percent loans for mortgages with no down payments. In the past there had been charges of racial discrimination with regards to not approving housing loans to minorities and the low income earners. To facilitate the granting of this mortgage loans a lot of times did not require all necessary documentations from the borrower and their income details. In this case a lot of this underprivileged income earners were paid on cash basis, so there was no official evidence of verifying there actual income. But a lot of subprime lending did not take place under CRA sponsorship. Instead the majority occurred with Countrywide and New Century rather than commercial banks such as Wells Fargo, Citibank, and JPMorgan Chase (Friedman, 2011)There were lots of little programs developed by the US government at both the federal, state and local levels intended to encourage more people to buy homes, thereby channelling more artificial demand into the housing sector like The Pro-ownership Tax Code. Developers were frequently receiving hand outs, free land, new roads and tax privileges to build new homes. First-time homebuyers in some areas received thousands of dollars tax acknowledgement.There were special treatments in agreement to buy a home as an investment, for example if a couple bought a house for half a million dollars and sold it for one million they will not pay capital gains tax, but if that couple invest in business that same money in stock or any other business that is not real estate and later sell that business for profit they will pay capital gains taxes of fifteen percent. Woods Jr. (2009) in his publication said it is not to suggest that any of these tax breaks are undesirable or should be repealed a tax break is an oasis of freedom to be broadened, not a loophole to be closed. Instead they should be encompassing to as many other kinds of purchases as possible, in order not to provide artificial stimulus to any sector of the economy.Americas national Reserve started the boom by increasing the supply of money through the banking system with the purpose to reduce interest rates. This system stimulated growth in the production of longer term projects such as construction, raw materials and capital goods. So this low interest rate made construction and real estate flourish vigorously in the early 2000. Real estate is not a common category of products that all consumers demand because of affordability in terms of believability and finance. In order wards not enough consumers out there could afford to purchase expensive homes. So the provideeral Reserve (Fed) cam e up the idea to increment money supply through banks, and banks with loose lending principles made home purchases went beyond the usual, and the notion of living the American dream was not far-fetched. Fannie Mae and Freddie Mac (Federal bailiwick Mortgage Association and Federal Home Loan Mortgage Corporation) including the Federal Housing Administration were all backed and sponsored by the Fed to be lending money to people who wanted to purchase houses. Criteria for lending were lowered and loans were approved at a record breaking level. All the new money that the Fed created was being routed into the housing market through their representative agencies Fannie Mae and Freddie Mac. This stimulus was the biggest that gave unnatural rise to the housing prices.Housing prices went up quickly instead of taking a gradual rising process supposedly with the rate of inflation or the rise in average incomes the bubble eventidetually busted and the housing prices went down and this caused the housing market to collapse and recession followed borrowers were prone to increasingly rising interest rates and falling home values, and could not be in a position to refinance their mortgages leading to higher monthly payments and constant failures to meet financial obligations resulting in foreclosures.Because of the causes arising from these defaults substantial amounts of low investment grade-rated mortgage-backed securities to default and the highest rated securities to be downgraded. The US government refusal to rescue the Lehman Brothers and eventually filed for bankruptcy was also another fall in abundance of hope. Financial institutions holding mortgage backed securities started writing down their relative worth which made them to become more financially vulnerable, as a result causing concern over counterparty risk and as such organisations started withdrawing from doing business with them (Kolb, 2010)Financial institutions inclination on risk taking could cause fina ncial crisis. There was a view that instincts for self-preservation inside major financial firms would vindication them from fatal risk-taking without the need for a steady regulatory hand, which the firms argued, would stifle innovation (Angelides, Thomas, 2011) when financial institutions act recklessly by taking too much risk something is bound to happen, especially when institutions are involved in trading, and in trading, money can be made as well as lost, example, large investment banks and bank holding companies tend to centralise their activities more on risk trading activities that bring in heavy profits. They expose themselves to danger in getting and making loans to borrowers with poor credit rating.Some of these institutions grew competitively as a result of poorly executed acquisition and integration strategies that made effective attention more challengingFinancial institutions and some credit rating agencies are adopting mathematical models to be used as reliable p redictors to predict risks, by so doing replacing judgement in a lot of occurrences.Before the financial crisis of 2008, the Republic of Ireland enjoyed a long period of economic boom, both in credit growth, bubbles in real estate, excellent and educated workforce, and an attractive location for inward investment especially from the US firms. These attracted people from all over the world to come and live in the country. Because of the rise in population there was urgent need for more houses to be built which brought growth to the construction industry and Ireland save the highest number of employment in the history of the state. All these led to the boost in the banking sector. The banks were willing to lend, in fact banks were literally forcing people to take loans even if they didnt need them. Credit cards were being issued to customers as long as there was weekly income coming into their account despite the fact these customers did not request for credit card. Home owners mortg aged their homes. A lot of people were encouraged to buy houses incentives were given to fist time buyers so as to instigate them. At the bust, the economy collapsed, companies started folding, people were made redundant, unemployment rose, banks started feeling the heat and government came to their rescue and bailed them out.A lot of money was pumped into real estate and prices of homes went up. As a result of banks lending money anyhow to people personal debts were rising faster than income and foreclosures everywhere. Banks stopped lending, and prices in the market dropped.The 2008 financial crisis was contagious spillover resulting from the United States subprime market. The cross-border processing was moving with great speed because of the close connections inside the financial set up and the powerfully organised supply chains in global product markets. Financial crisis of 2008 was contagious because we are now in a global market. There is evidence of significant increases in cross-market correlations in the more recent times. Global market, social media plays an effective roll, stock markets, single currency such as the Euro and the Eurozone, all trading at international level. What happens to one affects all.Conclusion judicial decision from a lot of the information surrounding the 2008 financial crisis and its causes, it was more like it happened mainly because of government oversight to supervise and monitor the financial experts and their institutions to constantly make sure they are in alignment with the regulatory systems is not appropriate that seem to miss the whole point, but rather too many loans were issued on risky basis to unqualified customers that were not credit worthy, and the government fully aware of this encouraged and kept on pumping money into circulation for their political gain.The old ways of scrutinising applications for loans were abandoned by the lending institutions for a riskier method so that everyone get to live the Ameri can dream.BibliographyAngelides, P, Thomas, B (2011) The financial crisis inquiry business relationship Final report of theNational Commission on the causes of the financial and economic crisis in theUnited States, Government Printing Office.Barton, D., Newell. 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