Good Example Of Financial Crisis Article Review

The financial crisis of the year 2007-2008 is termed as one of the worst crises to hit the world since the 1930s when the Great Depression plagued the world. The financial crisis almost led to the collapse of major financial institutions. The governments prevented the collapse of these financial institutions by bailing out the banks. The stock markets fell all over the world. The housing markets went down and resulted in foreclosures, evictions, and unemployment. The consumer wealth declined and there was a downturn in the economy. The period 2008-2012 saw a global recession and a debt crisis in Europe. There are five series of articles that explain the financial crisis and they include “The Origins of the Financial Crisis; “The Dangers of Debt: Lending Weight”; “Monetary Policy after the Crash: Controlling Interest”; “Stimulus vs. Austerity: Sovereign Doubts”; and “Making Banks Safe: Calling to Accounts”.
“The Origins of the Financial Crisis” is an article that explains how the financial crisis began. The article focuses on the causes of the global financial crisis. There were many mortgages that were lent to Americans in an irresponsible manner. People who had poor credit histories were lent the mortgages. These mortgages were risky, and the bulk of their risk was transferred to finance officers who converted them into low-risk securities. These low-risk securities were pooled together with anticipation that the property markets in America would rise (The Economist, “The Origins of the Financial Crisis”). There was a fall in the housing market in America from the year 2006. The low-risk securities were used to support securities known as collateralized debt obligations (CDOs). Investors bought these securities because they had been given good ratings by the trusted agencies. There were many parties that were blamed for the failures in finance. These parties include bankers, regulators, and central bankers.
“The Dangers of Debt: Lending Weight” is an article that looks at the role played by debt in the financial crisis. There were many people who defaulted in repaying their mortgages. Some of the investment banks were not able to handle the default because they had also incurred heavy debts. The banks that were low on cash stopped lending as well as those banks that were afraid to expose themselves to such risks. The economy was affected by the lack of funds, and this led to the involvement of the government in financial rescue attempts (The Economist, “The Dangers of Debt”). The efforts made by the government increased the weight of government debt. Some countries in the Euro region faced the risk of solvency. Greece ended up defaulting in the year 2012. Debt became a major cause and result of the financial crisis. Debt also played a big role in the continuation of the financial crisis.
“Monetary Policy after the Crash: Controlling Interest” is an article that explains the methods used by central bankers to promote growth after the economy had crashed. Before the financial crisis, the central bankers used simple policies that involved raising or lowering the interest rates to prevent inflation or increase growth and employment. The financial crisis was an eye opener and the monetary policy has been changed. The central bankers are now using some of the methods that are considered as unconventional (The Economist, “Monetary Policy after the Crash”). These methods include forward guidance and asset purchases. The central bankers are now buying long term assets to act as securities. The central banks print money with an aim of buying assets. This method is referred to as quantitative easing (QE). Forward guidance is a method that involves informing the public the future policies that will be adopted by the central banks.
“Stimulus vs. Austerity: Sovereign Doubts” is an article that focuses on the public debt that was incurred due to the financial crisis as well as the government debates on how to cut back on these debts. The governments increased their efforts to cut taxes and increase government expenditure so as to fight unemployment. On the other hand, the economists were of the view that cutting down taxes would not work. The people who were for the idea of stimulus supported Keynes ideas. Keynesians believed that the government needed to cut down on taxes so that people would spend more of their savings in the economy (The Economist, “Stimulus vs. Austerity”). The government’s efforts in bailing out financial institutions led to an increase in debt. Britain ended its stimulus so as to enable its economy to stabilize. On the other hand, America continued to spend leading to a decline in its structural deficit. Stimulus and Austerity are two approaches that can work in reviving the economy, but both of them have costs that are attached to them.
“Making Banks Safe: Calling to Accounts” is an article that explains ways in which banks can be safe without refusing to lend. Banks are important to the economy because they provide a link between savers and borrowers. The banks can adversely affect the economy when they go under. The banks can face a crisis when the customers all flock to the bank to withdraw their money. The threat of insolvency is big if the customers are asking for their money faster than the bank is selling its assets. Banks can boost their leverage through borrowing from debt markets or depositors and then lending out the proceeds (The Economist, “Making Banks Safe”). It enables the banks to add on their income generating assets. Another way that can be used by the bank is avoiding activities that are considered most risky. The banks need to hold more liquid assets and capital assets that will enable the banks to stay away from trouble.
In conclusion, the financial crisis occurred because there was laxity in regulations of financial institutions. Proper regulations and controls would have prevented the banks from lending to people who had poor credit histories. The government tried to save the banks from insolvency by borrowing so as to fund their debts. Consequently, the government incurred heavy debts. A country like Greece ended up defaulting in loan repayment. In my opinion, borrowing enables the economy to grow, but it can lead to financial crisis if proper controls are not put in place. My recommendation is that all financial institutions should have more than enough liquid assets and capital assets so as to avoid financial crisis. It is also important to lend to people who have good credit histories because they have a lower risk of defaulting compared to people with poor credit histories.

Works Cited

The Economist. The Origins of the Financial Crisis: Crash Course. 7 Sep. 2013. Web. 24 Mar. 2015. http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article
The Economist. The Dangers of Debt: Lending Weight. 14 Sep. 2013. Web. 24 Mar. 2015. http://www.economist.com/news/schools-brief/21586284-second-our-series-articles-financial-crisis-looks-role-debt-and
The Economist. Monetary Policy after the Crash: Controlling Interest. 21 Sep. 2013. Web. 24 Mar. 2015. http://www.economist.com/news/schools-brief/21586527-third-our-series-articles-financial-crisis-looks-unconventional
The Economist. Stimulus vs. Austerity: Sovereign Doubts. 28 Sep. 2013. Web. 24 Mar. 2015. http://www.economist.com/news/schools-brief/21586802-fourth-our-series-articles-financial-crisis-looks-surge-public
The Economist. Making Banks Safe: Calling to Accounts. 5 Oct. 2013. Web. 24 Mar. 2015. http://www.economist.com/news/schools-brief/21587205-final-article-our-series-financial-crisis-examines-best-way-make-banks