Analysis on the Current Personal Disaster in addition to the Banking Industry

The active economic crisis began as piece on the world-wide liquidity crunch that transpired involving 2007 and 2008. It happens to be believed that the crisis experienced been precipitated because of the considerable worry generated through economical asset providing coupled having a large deleveraging with the economical establishments on the leading 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 main banking establishments in Europe in addition to the United States has been associated with the global economical crisis. This paper will seeks to analyze how the worldwide monetary crisis came to be and its relation with the banking market.

Causes within the personal Crisis

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

The risky mortgages were passed on to finance engineers in the big money establishments who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was that the property rates in America would rise in future. However, the nationwide slump in 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 of your banking establishments had to reduce their lending into the property markets. The decline in lending caused a decline of prices while 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 institutions panicked when this happened which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency with the central banks in terms of regulating the level of risk taking in the financial markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest 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 because master-of-papers.com/ of 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 that the financial disaster caused to the global economy especially during the banking industry after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul of your international monetary markets in terms of its mortgage and securities orientation need to be instituted to avert any future economical crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending around the banking market which would cushion against economic recessions caused by rising interest rates.