The Financial Crisis Essay Example | Topics and Well Written Essays - 1250 words

The financial Crisis - Essay ExampleThe valuable lessons learned from the crisis will also be discussed herein. Bear Stearns, AIG, Lehmann Brothers, Northern Rock, and Goldman Sachs be some elite names that suffered most because of the economic crisis also known as recession. Lehmann Brothers filed for bankruptcy while AIG and a few other elites just hung in there with the skin of their teeth. This economic crisis is still having repercussions on countries such as Greece and Spain the whole of Euro Zone is facing a financial turmoil. There are a few other countries that have been not so severely affected by the same. The crisis was triggered off because of unchecked debt banks kept bulgecome loans to people who invested heavily in buying assets several things were taken for granted but when proved otherwise, there was hardly a place in the world to hide. Overvaluation in true estate is perhaps the biggest cause of the current economic crisis. It is better known as the subprime c risis in the US. The likes of Lehmann Brothers and other financial services went bust because they kept issuing credit to the people who thought the property price would increase and they would be easily able to pay off the debt that they are borrowing. It did not turn out that way and there was a short of equity. This is exactly why the financial institutions went bankrupt. The overvaluation is the biggest factor that caused the current economic crisis. Factors such as bad income assess practices have added insult to injury, bad owe lending also contributed heavily to this current economic crisis. The way to address the root cause is to let manse prices drop to where an average house is within the means of an average household. (Or, alternatively, boost the income of the average household to the point that they can afford an average house. But thats precise hard. Letting houses prices go on falling, although painful for e rattlingone who owns a house or who has lent money to so meone who owns a house, is very easy) (Root Cause of the Financial Crisis). Role of Monetary Policy Some of the main plausible reasons that caused the recent financial crisis have been identified in the above sections. According to Brunnermeie, cheap mortgage financing to sub-standard borrowers fuelled the boom in the U.S. housing market. Three factors were primarily responsible for the fall of the housing market in the U.S. (which, in essence, constituted a very small segment of the financial market in the country) transforming into a global contagion. First, the originate and distribute banking model, together with the high rate of securitization, led to declining lending standards and do it impossible to re-price the complex structured products. This significantly eroded the confidence level of banks, thereby disrupting the inter-bank markets and credit flow. Second, banks relied heavily on short-term funding sources, hence genteelness the risk of funding. Finally, the ever-gro wing integration of global financial systems and the increasing interest towards structured financial instruments quickly transmitted the crisis to all the major regions of the world. Gourinchas focused on the eccentric of monetary policy in the recent financial contagion as well as the role played by exogenous influences, particularly the rising slope external deficits referred to as Global Imbalances. According to Gourinchas, both explanations are not satisfactory as the sole reason behind the crisis. This opinion has