Analysis with the Active Monetary Disaster and also the Banking Industry

Analysis with the Active Monetary Disaster and also the Banking Industry

The latest economical crisis commenced as element with the world liquidity crunch that happened involving 2007 and 2008. It happens to be thought that the disaster experienced been precipitated via the detailed stress created because of finance asset marketing coupled having a significant deleveraging inside the economic establishments of the major economies (Merrouche & Nier’, 2010). The collapse and exit for the Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by principal banking institutions in Europe as well as the United States has been associated with the worldwide economical disaster. This paper will seeks to analyze how the worldwide fiscal crisis came to be and its relation with the banking market.

Causes from the monetary Crisis

The occurrence in the world wide economic crisis is said to have experienced multiple causes with the foremost contributors being the personal establishments along with the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced inside the years prior to the fiscal crisis increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and economic establishments from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to finance engineers on the big financial institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was that the property rates in America would rise in future. However, the nationwide slump around the American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most for the banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices inside of the property market and as such most borrowers who experienced speculated on future rise in prices experienced to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking establishments panicked when this occurred which necessitated further reduction in their lending thus causing a downward spiral that resulted to the worldwide economic recession. The complacency because of the central banks in terms of regulating the level of risk taking on the financial markets contributed significantly to the crisis. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the crisis stimulated the build-up of economic imbalances which led to an economic recession. In addition to this, the failure through the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the personal disaster.


The far reaching effects that the financial disaster caused to the global economy especially with the banking market after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul within the international economical markets in terms of its mortgage and securities orientation need to be instituted to avert any future fiscal crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending in the banking industry which would cushion against economic recessions caused by rising interest rates.

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