Discussion on the Financial Crisis

FINANCIAL CRISIS
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Financial Crisis
The financial crisis that occurred between 2007 and 2009 was a credit crunch culmination that had begun in 2006 and developed in 2007. Finance sector failure was a key factor in the previous financial crisis. However, the bankers were not the only people to blame, but also regulators and the central bankers. They had failed to keep imbalances in the economy at bay and an oversight on financial institutions (Allen & Carletti, 2010,). One of the most erratic errors by the regulators was to allow the Lehman Brothers of the United States to go into bankruptcy. The bankruptcy led to an increased panic in markets. The absence of trust led to a decrease in lending. Non-financial firms were not able to borrow and could not pay workers and suppliers as they had to freeze spending to enable them hoard cash. It resulted in a seizure in the operational economy. Progressively, majority of governments globally had to intervene in the bankruptcy of most financial institutions. Regulators were forced to rescue other company's scores to stem the presence of the panic in 2007.


After a period of increased rates of interest between 1970 and 1990, there came a period when the interest rates reduced. Despite the previous experience, a steady continuous growth and presence of low inflation led to investors believing that the interest will stay at a low level (Acharya, Philippon, Richardson, & Roubini, 2009). The new approach encouraged individuals to believe in a sustainable long-term interest level at a low level. People were then encouraged to own homes as shown in the chart above. The chart below shows that the demand resulted in an increase in prices of property by 45 percent in 2001 up to 2007.


Majority of individuals agree that the financial crisis began with the housing market of the United States and various factors contributed to the bubble of house prices. The most elaborate signs of the problem were witnessed at the beginning of 2007, when Freddie Mac made an announcement that it had halted the purchase of mortgage securities as risks were at high levels and the New Century Financial Corporation declared itself bankrupt. During the period, the ABC indexes indicated a higher potential for risk defaults. The indexes track the credit prices of default insurance credit on securities and backed by mortgages that are residential (Acharya, et al., 2009).
Despite the initial signs beginning to show early, most individuals agree that the beginning of the crisis was in August 2007. The period was characterized by massive withdrawals of funds for short-term in different markets that were considered as safe havens. The event was shown by the rapid haircuts increase in reports and problems experienced by asset-backed commercial paper (ABCP) givers that had issues in rolling over the unsettled paper. The main issue that caused all the problems stated above was the decline in the house prices in the United States that lead to the rise of concerns on subprime mortgages. The markets for short-term funding and the banking system were all victims of the crisis.
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