Number Of Causes Raising This Financial Crisis Finance Essay

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It is said by Penman that there is a bubble largely in financial markets during 2005 to 2007(Penman, 2013). The boom in the real-estate market in the United States resulted in the high housing prices, poor lending practices, and more risk taking by banks. After the bubble’s bursting, a financial crisis reduced the market value of stocks by 37 per cent in 2008 (Penman). According to the Oxford dictionary of finance and banking, “financial crisis is a collapse in the price of financial obligations, which may lead to a collapse in the economy. ” In this essay, it will explain the macroeconomic and microeconomic causes accounting to the above mentioned crisis; and then show the measures the UK government taking to solve the problem. In conclusion, the assessment of these actions will be made. Reasons There are a number of causes raising this financial crisis, which will be analyzed from macroeconomic and microeconomic aspects, especially the role of the securitization will be highlighted as a trigger to the crisis. Macroeconomic reasons Long period of low real interest rate Referring to Buckley, “the roots of the crisis were planted in the decade before 2007.” Table 1 in appendices shows the low real interest rates in the USA in the first seven years of the 21st century, which was not only a feature of the US economy, but also a global phenomena due to the co-ordination of governments around the world. This accelerates the increase of housing prices and asset prices (recall the inverse relationship between bond prices and interest rates) in the USA, in the UK and elsewhere. Furthermore, banks made use of these low rates by increasing their debt levels as a proportion of total financing, for the debt was cheap. However, debt interest is decided by dividends, and debt repayment ranks above shareholders’ capital on liquidation, so there could be another increased risk to shareholders. Global financial imbalance On the one hand, influenced by the low real interest rates, the West tended to import from capital-poor emerging market countries, for example China; on the other hand, through being a purchaser of bonds, surplus countries were willing to buy deficits countries’ securities, such as the US dollar government securities, instead of exchanging for their own currency. It means that deficits countries were able to get their fund to balance their deficits more cheaply. Therefore, the American and European governments were immersed in the booming economics, which also hastened the deregulation of their banking system. Microeconomic factors Consumer Inertia It is convinced by the financial institutions that the customers’ deposits or transactions were safe. Take securitization for example. During the process of securitization, there are several means being used to ensure consumers’ inertia. Firstly, the special purpose vehicle (SPV) made “a true sale”, which aims to guarantee the separation of the cash flow. Secondly, credit-rating agencies and insurance companies played crucial roles in keeping consumers’ confidence. High levels of corporate leverage To attract their shareholders, through enlarging the ratio of assets to equity,

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