Examining The Causes And Effects Of Financial Crisis Finance Essay

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A financial crisis is interruption to financial markets that disrupt the market’s capacity to allocate capital – financial intermediation and hence assets come to a cut short. Recently in 2008 the world has been affected with financial crisis. In this paper we are going to see the cause of financial crisis, how it started and effect the world. And also the thoughtful and critical analysis is made for the origin of the recent financial crisis. All the articles and various volumes in coming future will explain why the crisis was actually predictable and why it should have been foreseen and the world id taking note of these warnings.

Origin of Recent Financial Crisis:

As we know that if USA effects with the financial crisis automatically the whole world will get affected. As we heard that recently in 2008 the world is affected with the financial crisis, now it’s in better condition. This 2008 crisis has been started in USA then it widely spread throughout the world. Early in 2000 and 2001 there was terror attacks on the USA, at that time USA and most other advanced economies embarked on the period of constant expansion economy policies to ward off recession. For example, during that time, the Federal Reserve had lowered its discount rate more than 27 times. So by the reduced in the discount rate, other countries like china had purchase US treasury bonds, due to this there was a rapid growth in credit. Additional rise in the house prices which further fuelled credit growth, through lending mortgage. In USA, the banks will lend mortgage to households without the necessary means to pay back loans, which took on huge proportion. The average mortgage lend by the bank is about US$1.3 trillion (Lin, 2008). In USA, Fanny Mae and Freddie Mac the mortgage lenders had secure these subprime loans, which were sold all through the financial system as assets. They were able to issue and securitize these bad loans due to a mixture of insufficient parameter and financial innovation. And which later made difficult for the other institutions to judge the risks of these securitized mortgages and led to increase subprime mortgages. C.O.D.s and S.I.V.s, R.M.B.S. and A.B.C.P were sold on false pretences. There were promoted for making safer investment. There has to make lot of money for their creators, but instead of that they didn’t have to repay. It leads to bust and spread misunderstanding, luring investors into taking on more risk than they know. In the middle of 2007 by increasing defaults on mortgages and growing number of foreclosures in the USA which signaled that the subprime market was in crisis. By which the house prices and financial stock price falling down. This reduced the household assets in USA by trillions. The financial institutions like Fanny Mae and Freddie Mac and well known other institution was threatened by these defaults and drops in house and stock prices. And in 15th September 2008, the firm of Lehman Brothers filed for bankruptcy with US$39 billion in assets,

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