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 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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Taylor, J. B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong (No. w14631).
Introduction In 2008, the world experienced a tremendous financial crisis which is rooted from the U.S housing market. Moreover, it is considered by many economists as one of the worst recessions since the Great Depression in 1930s. After bringing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It ruined economies, crumble financial corporations and impoverished individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brothers and AIG.
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.
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.
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.
The economic recession of the late 2000s has been called the greatest economic downturn our country has faced since the Great Depression. American businesses and banks are failing, foreclosures are spreading like wildfire, and unemployment numbers have reached double digits. Under our current president, many are optimistic, but many others are fearful for the future. Economists have different speculations regarding the causes of the “Great Recession”. Some blame it on higher prices for necessities like oil.