TheFinancial Crisis
Aglobal financial crisis can be described as a period of economicconstraints experienced by consumers and markets. It is a situationthat is quite hectic for the survival of businesses and consumershave a tendency of reducing purchases of different goods andservices. In such a case, the business environment gets unbearable,and the mode of operations tend to change. Due to the hostilebusiness climate, purchases of goods and services usually go downuntil the situation is resolved. A good example is the 2008 financialcrisis that hit the globe. The consequences and effects were feltacross the world in various capacities. The effects were felt acrossEurope especially the European Union, Africa, South Americancountries and Asia among others. Due to the severity of the crisis,many experts have tried to illustrate the causes, consequences, andcountermeasures [ CITATION Bri14 l 1033 ].
Accordingto the article in consideration, the financial crisis resulted from acombination of events. The core elements involved mismanagement andmisperception of risk, control of the financial system, and thedegree of interest rates. These three elements were the core reasonsbehind the financial crisis. By looking at the events of the crisis,mainly basing on the mentioned factors, this paper will clearlydemonstrate the real causes. The macroeconomic results of the crisiswere quite severe. In the business environment, economies run mostlydue to confidence. In other words, once consumers lose confidence ona particular commodity or service, they tend to lessen theirspending. On the other hand, banks, as well as other financialinstitutions, retract from lending once they lose confidence. Asentailed in this paper, such consequences will be expoundedshowcasing examples from different parts of the globe. The paper willalso dwell on countermeasures to the crisis and how some countriesmanaged to struggle out of the crisis. In that regard, analysis ofthe article will be based on causes, consequences and countermeasuresto the financial crisis [ CITATION Wym11 l 1033 ].
Causes
Asearlier elaborated, the financial crisis is caused by three coreelements i.e. mismanagement and misperception of risk, control of thefinancial system, and the degree of interest rates. Conceivably thefundamental driver of the financial crisis pertains human psychologyregarding the perception of risks. Whenever things are flowingsmoothly, acuity of risk decreases. The general notion is that thetimes are infinite. However, when things start going wrong, theperception of risk increases even beyond the usual level. Theaversion of risk tends to change drastically and the effectsspontaneous across the globe. As evidenced by studies, the thoughtson risk altered in the years before the crisis. The yields on UScompanies or upcoming market bonds narrowed especially at riskierends as compared to the government bonds as well as other securitiesthat are deemed safe. The investors were more concerned withsearching for safety rather than looking for yields. They avoidedtaking risks in some sectors leading to a decline in growth. Theboom-cycle impacts of psychology are augmented when investors utilizeleverage. Borrowing to acquire assets is quite lucrative especiallywhen the prices are on the rise. The benefits outside the interestcosts are enjoyed by the investor and not the lender. However, whenthings are going haywire, the investors’ losses tend to be enlargedby leverage [ CITATION Luc10 l 1033 ].
Beforethe 2008 global crisis, US investors had lost confidence in thesubmarine mortgage values causing a liquidity crisis. The US FederalBank was forced to inject a huge sum of capital into the financialmarket. The event was back in July 2007. By the year 2008, thedisaster had deteriorated as stock markets across the world crashedbecoming highly unstable. Consumers become less active fearing whatmight happen. As entailed in many studies, the perception of risk is,therefore, a significant contributor to the financial crisis [ CITATION Sti10 l 1033 ].
Thefinancial disaster is also widely due to the insufficient financialregulations. Some countries have limited financial regulationsleading to an unstable system. As various economists pointed out,some loopholes within the laws led to the financial crisis. Forinstance, the federal policies intended to enlarge homeownership inan “off-budget” criterion favored lending to individuals whoacquired homes whose affordability was beyond them [ CITATION Mik09 l 1033 ].
Dueto the lack of adequate regulatory policies and even feeble policies,individuals borrow or acquire commodities that they cannot afford.The same case applies to the governments, they use more than whatthey pose, thereby increasing the borrowing rates. It is a norm thataffects most third world countries. When a crisis hits the developednations, the impact is felt even in the underdeveloped countries [ CITATION Dir08 l 1033 ].
Thethird component that concurred with the perception of risk was theinterest levels that were quite small. The policy interests ratesattained significantly low levels than it had been seen historically.The abnormal investor demand brought the long rates down. Some of theinvestors included central banks as well as other government agenciesin industrialized and emerging economies that accumulated foreignreserves. The small degree of interest proportions resulted in highleverage to the amusement of many observers. At that time, theinflation pressures were subdued, and the macroeconomic state did notwarrant high-interest rates [ CITATION Jeb13 l 1033 ].
Consequences
Theeffects of the crisis were felt across the globe in differentcapacities. Commodity prices boomed, industrial output declined asvarious macroeconomic indicators deteriorated. The disaster consumedan enormous sum of housing and financial wealth. For instance, theU.S. household net worth hit $16 trillion, or 24%. Additionally, aconsiderable amount of human capital was wiped out both in discountedfuture and current wage income. The unemployment levels alsoincreased with limited opportunities in different sects [ CITATION Lut13 l 1033 ].
Eventhough the consequences were felt in many countries across the globe,the south-eastern Europe showed resilience in limiting the crisis.The region had full support from foreign owned banks and companies aswell as international organizations. The bodies did not exit themarkets leading to a stable economic period across the region.However in most of the African states, the disaster was quiteinjurious to their economy. Taxes on commodities were heightenedincreasing the prices. People opted to reduce their spending onlyshopping for essential goods [ CITATION Pet10 l 1033 ].
Countermeasures
Restorationof the international banking system to a healthy state called formore stringent measures on some dockets. Governments providedconsiderable backing to the financial markets and institutions.Banks’ access to funds has been made certain through wholesale debtissuance. Some governments have injected a huge amount of capitalwhile few have been assisted in limiting risk within the balancesheet [ CITATION Jus14 l 1033 ].
Thegovernment plays an immense role in countering financial risks. Somepurchase the assets placing them in a unit detached from the bank.They then insure the assets still in the banks against losses ordevote in joint investment funds that purchase the assets.
Thoughthe article expounds efficiently on the different causes of thefinancial crisis, the countermeasures involved are not that clear.The measures are not yet tested and proven. They are just in apreliminary stage and whether they can be a success or not, it hasnot been elaborated effectively.
Conclusion
Thefinancial crisis is one big aspect that draws some ideologies. Manystudies have tried to address the cause of the crisis from adifferent perspective. Most of them concur that the perception ofrisk majorly caused the crisis. The changing notion on risks led to acautious approach to doing business that escalated to exits byinvestors from institutions. Investors opted against taking risksfearing massive losses.
Asa result, people acquired commodities they could not affordespecially houses leading to a disjointed economy. The regulationsdid not bar individuals from making unaffordable purchases. As thearticle clearly expounds, the effects were felt in a variety ofdegrees. For example, consumer purchases went down since people couldnot afford other commodities due to heightened prices.
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