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.
The three most important things that I learned in this course are as follows: 1) Causes of Financial Crisis Financial crises have influenced the os of financial markets in past. The most important the Great Depression in 1929-30, the 1970s inflation failures and the banking difficulties in the 1990s led to problems in the financial markets causing serious disturbance. The recent financial crisis which became known in 2007, though the roots were implanted much earlier, has been the worst situation financial markets have ever faced. Causes of the Financial Crisis Several financial statements have been prepared to describe the causes of this current financial failure. There are a variety of factors that has resulted in the explosion of this financial crisis.
Telling the narrative of the financial crisis: Not just a housing bubble. Retrieved from http://www.brookings.edu/~/media/research/files /papers/2009/11/23%20narrative%20elliott%20baily/1123_narrative_elliott_baily.pdf Hart, O. (2009). Regulation and sarbanes-oxley. Jpurnal of Accounting Research, 47(2), 437-445. doi:10.1111/j.1475-679X.2009.00329.x Wallison, P. J.
The policy makers was also lack of accountability that fail to encourage optimism about the reforming the policy process itself (Adrian & Atkinson 2009). The decision by the U.S. Treasury and the Fed to let a major bank (Lehman Brothers) fail led to a system-wide loss of confidence that exacerbated the crisis. The failure of policy makers to deal with the crisis should be seen as a factor in aggravating the crisis. (1) Housing market failure - An Economics professor Taylor conducted a research in 2009 and suggested that the financial crisis was due to government policy and intervention that leaded to excessive money and contributed to housing boom and bust (Taylor 2009). By using the information given in The Economist (October 18, 2007), Taylor indicated that the federal funds interest rate was deviated from the suggested rate based on Taylor Rule – Fed interest rate should be adjusted according to economic situations such as the inflation & employment level.
A credit crisis can also be identified as a shortage of available credit for businesses and consumers. Also known as the credit crunch, these credits may be in the form of personal loans, company loans or credit cards debts. In the past, the term credit crisis was only familiar to people that are involved in the financial sector, but since the occurrence of the 2007-2009 credit crisis in the United States, this term has became a common saying among all walks of life. The credit crisis has affected the lives of many people. The fall of the property market with high foreclosure rate and default loans has made it harder for businesses to expand.
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.
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The financial crisis from 2007 has caused the greatest global economy recession since the Great Depression and also the European sovereign debt crisis. The consequences and cost are enormous. Due to this fact, explanations and responsibilities for financial crisis are searched so that the role of corporate governance and financial engineering is set on the spotlight. The financial crisis has been said to be a case of financial engineering and corporate governance gone wrong. In this paper I will discuss this statement and demonstrate that wrong financial engineering practice and corporate governance effectively caused, or at least in part, the financial crisis.
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