Solving the Foreclosure Crisis

Powerful Essays
I. Introduction

The current financial crisis was triggered by subprime mortgage in the United States. This lead not only to a large amount of mortgage default but also other problem suc as, credit card and store loans. The result was huge losses in financial institution in the United States Europe and Asia, because of financial liberalization had enabled the transnational transaction of “bad” assets. Some people argue that this crisis was aggravated by Fair Value Accounting because it prices an asset based on its current value. Which means, the financial institution show the current prices of their asset in financial statement. In this crisis, almost all of assets values are decreased, then people have less confidence about the financial institution. It makes the crisis getting worse. This research is necessary because this is the biggest issue in accounting now. Moreover, some experts in accounting, politician, and investors are still debating about this issue because some of them argue that Fair Value Accounting has responsible to current financial crisis and the other have an opposite position. This topic is related to accounting knowledge that we learned in the university. This research paper will investigate whether Fair Value Accounting is the cause of current global financial crisis. 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...

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...tion. Firstly, the Fair Value Accounting is not always accurate in the financial market because the value of assets and liabilities always fluctuated. Sometimes, the asset value is overestimate and underestimates. Secondly, the Fair Value Accounting makes financial institution reduce their ability to face the risk because in this current economic situation the value assets are fluctuated. It is a problem to managers to sell or buy the assets. Thirdly, the Fair Value Accounting has impacted on irrational investment behaviour because the movement of price in the market in a short time make the panic market. If the government have healthy market environment, the Fair Value Accounting is become value added to financial institution. Therefore, the current financial crisis is not caused by the Fair Value Accounting, it just shows transparency in the financial statement.
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