The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and irresponsibility of some of the government agencies led to the crisis. According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked their rates according to what worked better in the earlier decades, instead of lowering the rates in order to prevent the crisis.
Ethical corporate behavior has been a recurring issue of public policy. Recent events have brought this issue into sharp focus beginning with the Enron scandal in 2001 and more recently the financial crisis of 2008. Subsequent regulation such as the Sarbanes-Oxley act seem to be in reaction to the public clamoring for government action in the wake of painful economic outcomes. A deeper examination of the events leading up to Enron and the financial crisis both seem to indicate that government agencies were asleep at the switch. Policy such as Sarbanes-Oxley in the wake of Enron have not prevented the more recent financial crisis of 2008.
The Economist (2008) ‘Confession of a risk manager’, [Online], Available: http://www.economist.com/node/11897037.htm. [30 Oct 2013]. Wilfield, W. E. (2013) Ethical reflections on the financial crisis 2007/2008: making use of Smith, Musgrave and Rajan, New York and Heidelberg: Springer, pp. 1-4.
Teo, M. (2009) ‘The geography of hedge funds’, Review of Financial Studies, vol. 22, no.9, pp. 3531-3561. Zhong, Z. (2008) ‘Why does hedge fund alpha decrease over time?
PDF file. Warwick J. McKibbin, Andrew Stoeckel, The Potential Impact of the Global Financial Crisis on World Trade http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2009/11/18/000158349_20091118083139/Rendered/INDEX/WPS5134.txt
There are a variety of factors that has resulted in the explosion of this financial crisis. Downfall of the US housing market; highly benefited financial dealings and a low interest-rate promoting borrowings, have all contributed to the recession monetary market. Let us now consider these various reasons in a little detail. Low Interest Rates Following the sudden increase of the dot-com bubble and the possibility of decline threatening the US management started dropping the interest rates to improve the economy. The interest-rate turned as low as 1.5% in June 2003 which was at its least possible point since 1958 (Gerding, 2009).
At the height of the global crisis, the weaknesses of both the method were illuminated. Particularly, they were subject to “manipulation” in favor of the banks and as result, Basel II failed to serve its purpose of ensuring banks have adequate minimum capital (Reinmart, 2009; Schemmam, 2008; Lennox & Becker, 2011). Categories of Risk Basel II defined a framework of capital adequacy through three pillars. The first pillar defined the capital requirements, elaborating rules of capital ratio while putting into consideration the above mentioned categories of risk. Credit risk, was the initial concern of Basel I, it is the risk associated with borrower’s default, a factor that might push the bank in question into liquidity or insolvency crisis.
Ocaya (2012) state that the credit crisis is a financial market or economic meltdown of borrowing the funds to the borrower and cannot get back, it evaluated by severe shortage of money or credit bring accumulation of bad debts, defaults and falling financial institutions among others. However, the experts and economists are unclear as what form a credit crisis. The Wall Street defines a credit crisis as a “period during which borrowed funds are difficult to get and, even if funds can find, interest rates are very high”. Credit crisis mostly began in 2007. The effect of the credit crisis has brought fall down on the housing market in some country resulting in foreclosures and unemployment.
This financial crisis also referred to as the great recession was triggered by liquidity problems in the United States economy. Many large financial institutions collapsed according to Geczy (2010). The government had to bail out some banks and this resulted in a decrease in the stock and money funds investments in the United States and spread on all across the globe. A report compiled by the U.S Financial Crises Inquiry Commission shows that the infamous global crises could have been avoided. It pointed out that failure in different financial institutions including the Federal Reserve accelerated the crises.
National Bureau of Economic Research - Boasson, V. (2012) The 2007 – 2009 Global Financial Crisis: A research Synthesis. Sigillum Universitatis Islandiae. - Glick, R., Hutchison, M. (2011) Currency Crises. Federal Reserve Bank of San Francisco Working Papers. - Havranek, T. , Rusnak, M. , Smidkova, K. , Vasicek, B.