Can Financial Regulation Prevent A Financial Crisis?

Financial Regulations to Prevent Future Financial Crisis
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Financial Regulations to Prevent Future Financial Crisis
The financial crisis is the condition in which some commercial assets unexpectedly lose their nominal value. The serious economic crisis occurred in the 19th and 20th century which were related to banking panics and other declines associated with this bank panics. Different situations that resulted in financial crises are stock market crashes, severing defaults and also currency crisis. The financial crisis is a global disaster that directly leads to a loss of paper wealth and significant change in the economy. However, many economists have tried to offer theories regarding how to prevent the financial crisis, although this problem continues to occur. In the year 2007 and 2008, there was a monetary crisis referred to as global financial crisis and 2008 financial crisis that are considered to have been the most horrible economic crisis since the 1930 Great Depression. This problem started in the US from 2007 in the subprime mortgage market and later developed into a full-blown worldwide banking crisis. This issue resulted in 2008 collapse of investment bank Lehman Brothers. Accordingly, the understudy will, therefore, discuss causes of the financial crisis and whether financial regulation can prevent a financial crisis.[R. W. Kolb, Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future, Hoboken, N.J., Wiley, 2010, P. 56.] [Kolb, P. 74.] [Kolb, P 104.]
Causes of Financial Crisis
The financial crisis is primarily caused by deregulation in the commercial industry. Deregulation means eliminating constraints, particularly in economic regulations (Kolb et al., 2010). Earlier, some rules allowed banks to participate in hedge fund and trading with depositor's money through risky investments. However, there was a time when banks created a lot of money; therefore, they used to raise the house prices and also take risks on financial markets. Moreover, when a bank gives out a loan, new money is generated. Nevertheless, this money gets invested outside of the commercial sector which includes personal loans and credit cards. Lending large amount of money to property markets makes the housing price to go up. Therefore, interests to every loan that the bank gives out have to be paid. And with the debt rate rising rapidly than the incomes, some individuals become unable to pay their mortgages. Therefore, following the failure from repaying the debts, banks find themselves in a position of going bankrupt.[R. W. Kolb, Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future, Hoboken, N.J., Wiley, 2010, P. 56.]
In the year 2001, Fed funds were lowered to 1.5% by the Federal Reserve to battle the recession. During this period, investors used hedge funds to gain higher income. Therefore, low interest meant that bonds brought low results to allowance fund managers; as a result, a huge amount of money went to hedge funds. In 2004, fed funds rate was raised by the Federal Reserve as the interest rate to the loan reset. Therefore, housing prices began to lower as the supply outpaced the demand. This trapped the house own...