Analysis of the Present Money Crisis additionally, the Banking Industry

The latest economic crisis commenced as part of the worldwide liquidity crunch that happened somewhere between 2007 and 2008. It is believed that the crisis experienced been precipitated through the wide-ranging worry produced by means of monetary asset promoting coupled accompanied by a large deleveraging inside monetary establishments of your major economies (Merrouche & Nier’, 2010). The collapse and exit of the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by big banking establishments in Europe together with the United States has been associated with the global economic crisis. This paper will seeks to analyze how the global personal disaster came to be and its relation with the banking marketplace.

Causes within the financial Crisis

The occurrence on the world economic crisis is said to have had multiple causes with the most important contributors being the fiscal institutions and therefore the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced in the years prior to the money disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and personal institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to money engineers during the big monetary establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump during the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most in the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices in the property market and as such most borrowers who had speculated on future rise in prices experienced to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking establishments panicked when this happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency with the central banks in terms of regulating the level of risk taking during the monetary markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest that the low policy rates experienced globally prior to the crisis stimulated the build-up of personal imbalances which led to an economic recession. In addition to this, the failure with the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the fiscal disaster.

Conclusion

The far reaching effects the personal disaster caused to the global economy especially from the banking community after the Lehman brothers bank filed for bankruptcy means that a www.myroyalessays.co.uk/ comprehensive overhaul on the international fiscal markets in terms of its mortgage and securities orientation need to be instituted to avert any future money disaster. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending within the banking industry which would cushion against economic recessions caused by rising interest rates.