(Lorrette, 2013) Apart from that, the credit crisis has also affected the productivity of firms as the process of production was disrupted due to the limited availability of funds. (Akiyoshi and Kobayashi, 2010) There were a few causes to the credit crunch, one of the most debated issues was “Bank CEO Incentives were the major factor in the credit crisis”. The topic which has been debated by academic experts on “World Bank All about Finance Blog” has provided an insight to the people in the financial field. (Luo and Song, 2012) According to their research, Rene M. Stulz and Rudiger Fahlenbrach disagree with the statement above. The authors argue that Bank CEOs have taken actions that... ... middle of paper ... ...Meegan, R. 2009.
The problems arrived over a period of time from 1995 to 2008. The first and main problems that lead to the economic collapse was sub prime mortgages. Sub prime mortgage is a certain kind of loan granted to people with poor credit histories, who which wouldn’t usually be qualified for conventional mortgages (Investopedia). These sup prime mortgages would backfire on banks across the nation resulting in huge financial loses. According to USA Today, “Housing crisis deepens.
The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market. What at first seemed to be an economic slump turned into a brutal crisis, and all eyes looked to the Government and Federal Reserve to help the economy.
(n.d.). Investopedia. Retrieved March 4, 2014, from http://www.investopedia.com/terms/m/monetarypolicy.asp Isidore, C. (2008, December 1). It's official: Recession since Dec. '07. CNNMoney.
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.
In times of financial panic, concerned consumers would withdraw all of their money. These mass runs would cause a shortage in currency. As a result many banks went under when they ran out of money and where unable to honor deposits. Following years of economic instability the Federal Reserve Act of 1913 was passed by Congress. The Federal Reserve was charged with control and regulation of the financial industry and monetary policy.
The unconventional monetary policies implemented by the Bank of England, U.S. Federal Reserve and the European Central Bank in response to the financial crisis The signification of the financial crisis followed the collapse of Lehman Brothers in September 2008 caused the decrease in the market activity and the growth of globalization economy. A vast of problems, such as deflation, reduction in capital liquidity and so forth, confront with each government and central bank as well as having significant negative effect on development of economy that lowering of GDP. After the financial crisis erupting and spreading to all around the world’s financial condition, some measures for example, lowering of interest rate and keeping the reserve requirement lowing, implemented by central banks aimed at stabilize market price and funds liquidity to support aggregate demand. However, actually, the central banks’ interest rate is very low in United Kingdom, European system and United Stated, which is closing to zero bound, so that it is difficult for central banks to maintain financial condition and support a further stimulation via tool of interest rate (Benford et al, 2009). Meanwhile, commercial banks reduced the aggregate of bank loans in order to remain sufficient reserve and prevent their value of assets, because not enough money expand their investment to profit with high risk investing environment.
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.
Sadly, they are sunk in debt and can’t find work in order to support their families. Too many people are becoming victims in this cruel economic time and losing their homes. My proposal to fix this problem, is to restructure the foreclosure practices that banks are resorting to. The reason banks do it? Banks have investors they need to please; they have annual reports to publish to the public.
The prices then started to go down and the big financial institutes which were the major investors in subprime MBS lost heavily. In result of this the home prices started decreasing rapidly and it caused foreclosures. The foreclosure issue began in late 2006 in the U.S. and continued to drain wealth from consumers and the banking institutions. It affected the other loan types and default on those loans increased enormously and the crisis got bigger and started to affect other parts of the economy. The basic cause of the financial crises falls collectively on debt and mortgage-backed assets.