This research will focus on the history and effect of financial crisis and the application of Fair Value Accounting in the financial institution during this financial crisis. II. The Financial Crisis and The Fair Value Accounting II.1. Financial Crisis II.1.1. The History According to Arnold (2009, p.803-809), subprime mortgage defaults in the United States was the first problem in this current financial crisis, then bubbled damaging cris... ... middle of paper ... ...tion.
With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes. II. Assessing the Housing Crisis In terms of looking at how credit rating agencies affected the market as a whole, they played a role within the mortgage crisis as they gave way to a real estate credit bubble.
It was the eventual overheating of the housing market bubble that led to the financial crisis of 2008. The crisis ultimately led to a substantial rise in mortgage defaults and home foreclosures as well as large losses for both banks and shadow banks that owned mortgage-backed securities and higher volatility in the stock market (Mankiw 349). Mankiw provides an adequate overall analysis of the 2008 financial crisis as it occurred; however, Mankiw leaves out many key points in his case study in reference to factors that contributed to the financial crisis and its ultimate repercussions not only on the United States economy, but on the global economy as well. Mankiw correctly diagnosis many of the factors that led to the 2008 financial crisis and it is appropriate to address them and further elaborate the effects they had on the crisis. The first of these issues is the financial innovation that came to be known as securitization.
It does not take much attention focused at the media to see that our great nation is struggling economically. One of the major contributors to this current economic meltdown is the rapid increase in foreclosures across the country. The country’s immense housing crisis can be addressed by referring to not only the accumulating irresponsibility of the individual American loan borrower, but also the growth of greed at the corporate level which led to the financial market’s negligence. To stop the spread of this issue we should look at closer government watch of the market and specifically focus on consumer education. The Quagmire What is foreclosure?
If Americans believe guidelines are in place to prevent another crisis, confidence will return to the housing market. Further, in doing so, we must not ignore possible consequences of a failure to enact measures that are needed to shore up the housing market in the near-term. On the simplest level, I believe in Smithsonian Economics. However, the United States is anything but a ‘simple’ economy. We run the largest, most complex economy in the world.
On its surface, the current foreclosure crisis appears to have erupted from a volatile mix of debt, deregulation, risk, and over-leveraging within the economy. This; however, is a merely symptomatic approach to the recession, and does not address its underlying causes. In order to truly solve the crisis of foreclosures, one must address the systemic deficiencies which allowed the crisis to originally form. In the housing sector, the foreclosure crisis can be viewed as the bursting of the housing bubble. Indeed, the economy as a whole around the turn of the millennium can be characterized by its bubbles, and any solution to the housing bubble must necessarily take into account the complex web of interconnections between each and every economic sector.
The US Financial System: A Crumbling Empire The financial system has been crucial to the role of free enterprise. “Financial markets have come to supply non-financial corporations with mechanisms for managing their risks and for comparing and evaluating diverse investment opportunities in a highly complex global economy” (Cindin, 2008). “However, despite the lifetimes it took to build our financial institutions, bad luck and careless risk management have jeopardized careers and mortgaged these institutions’ futures”(Wallace, 2008). The nation is currently attempting to deal with the biggest financial crisis since the Great Depression. It is now imperative that a way be found which will re-regulate finance without undermining finance’s needed innovative capacity.
They cited the ill judgment of the banks and financial institutions, the over-speculation in real estate and the share market, the collusion between governments and businesses, the bad policy of having fixed exchange rates (to the dollar) and the rather high current account deficits. They studiously avoided blaming the financial markets, or currency speculation, and the behavior of huge institutional investors. Although the cited weaknesses certainly existed, the view that these in themselves caused the crisis was difficult to sustain. For it implied that the "economic fundamentals" in East Asia were fatally flawed, yet only a few months or even weeks before the crisis erupted, the countries had been praised as models of sound fundamentals to be followed by othe... ... middle of paper ... ...ternal debt was only revealed after the crisis had broken out. It was later found that The debt levels had climbed rapidly to dizzying heights: about US$150 billion for South Korea and Indonesia, and about US$100 billion for Thailand.
Simply, the best preventive measure to the foreclosure crisis would have been to not to overextend yourself. The credit phenomenon, of buy now and pay later is one of the major culprits to blame for the current situation. This is a major reason why the country is in such trouble right now. With growing unemployment, many Americans are unable to pay off their current debts. In addition there is no incentive for many homeowners to pay off a mortgage that is greater than the current market value of their home.
Comparable to a cancer, the home foreclosure crisis has infected the financial sector of... ... middle of paper ... ...ted to the amount of money and responsibility that they are accounted for. Since the unforeseen cannot be accounted for, the present time needs to be. Although it may seem demanding, both borrowers and lenders need to anticipate that which they cannot foresee. A change is needed in the overall culture and attitude that Americans have about credit, not that it needs to stop, but that limitations need to be taken. Spending beyond means and living from paycheck to paycheck, whether by choice or not, makes anyone susceptible to financial uncertainty as a result of the unforeseen.