Satisfactory Essays
The global financial crisis had its origins in the United States with the mortgage crisis in 2008. Investment bankers, insurance companies, mortgage lenders were the major players in this game. Severe financial problems led to a freeze of credit markets and resulted in global financial crisis. Primarily I am going to indicate the main factors that played role in the global financial crisis. After that I am going to concentrate on the financial meltdown in Iceland. Finally, I am going to discuss the similarities and differences of Icelandic crisis and global financial crisis. The main causes behind the global financial crisis were deregulations of banking sector and ‘’If it is not illegal, it is fair’’ mentality. High-ranking executives who ran the most powerful financial corporations used financial markets as their playgrounds. There was a circle of collude between the financial institutions. As they were betting on riskier assets, their revenues and executive bonuses were skyrocketed. Subprime mortgages were the breaking point of the crisis. The reserve requirements for mortgages were % 2.5. This means that if more than % 2.5 of the loans goes default, taxpayers have to bailout the companies. Mortgage backed securities were the breaking point of the global financial crisis. Federal Reserve Bank lowered interest rates to % 1 so banks from all over the world started borrowing cheap credit. Banks increased their leverage. In mortgage market, investment bankers combined thousands of subprime mortgages and started selling them as Collateralized debt obligations (CDO) to the investors. These CDOs were the baskets of subprime mortgages that ranged in various risks. CDOs were rated high by rating agencies so that they can be insured. ... ... middle of paper ... ... the world and dragged the whole world economy in recession. Iceland didn’t have the financial derivatives like mortgage backed securities or collateralized debt obligations but borrowed 10 times more than its GDP and took lots of risk when lending those funds. Lehman Brother’s collapse on September 15 played critical role because it stopped interbank lending all around the world. As a result Iceland economy collapsed. These events should be a good lesson for financial markets and governments for the future. Deregulations are necessary for the expansion of the economies in this globalized world. However if they are not well calculated, economic collapses likely to occur. In order to prevent these kind of catastrophic events, governments and regulators must work for the long term well being of the economy. Not the short-term gains of companies and their executives.
Get Access