Financial crisis is a situation in the economy of a country where the supply of money to the economy is over powered by the demand of money (Cali & Kennan, 2010). This situation causes deficits to the providers of money like banks where they are forced to sell their securities to get money and allow it to flow in the economy. The world has faced a financial crisis in the recent past, which was triggered by several factors. In this essay, we are going to look at this recent financial crisis and its aftermath. We will also look at what triggered it and the impact the key players in the economy have had to this financial crisis.
The financial crisis originated from the accumulation of debt in the economies of many countries (Batten &Szilagyi, 2011). This accumulation of debt occurred due to loan defaulters. Loan defaulters are people who do not pay their loans within the required time and at times, they do not pay at all. This means that the banks cannot get the required returns from the loans, which are lend with some interest. Another cause of this financial crisis is the accumulation of bad debts (Mason, 2010). Bad debts are debts, which cannot be recovered from the customers because he is bankrupt or he died. This has caused solvency to most banks leading to lack of enough money to circulate in the economy. A combination of key players has had a big hand in the financial crisis. The mortgage banks are one of these key players in the economy. They have a hand in the financial crisis in that they are unable to claim the money they lend as mortgages. A mortgage is an amount of money given to an individual to buy a house, which he should return within a given period. Mortgage banks have given large mortgages to individuals who have not honored their pledges to pay. This has led to less money in circulation and hence the current financial crisis. Another key player in any economy is the investment banks. These banks offer loans to invest in other businesses. These loans have been defaulted and hence less money in circulation.
Another key player in the economy is the rating agencies. They assess the worthiness of an organization to issue debt to the financial market. They give information on whether the organization is likely to pay the interest and the principle amount within the required time. An example of such rating agencies is the Fitch Rating Agency (Cali & Kennan, 2010). They have a hand in the current financial crisis in that they may have given the wrong information about the worthiness of various organizations to get credit from moneylenders. This means that the organizations do not pay the money back and hence a deficit occurs in the market. Regulation in the financial market has also contributed to the current financial crisis in that, there have been regulation on the amount of money to release by the central bank to the economy. At times, this causes a deficit to the economy and demand for money overpowers supply.
The monetary stance policy set the of the year 2002-2004 set the stage for this financial crisis in the following way. This policy was based on bailing- out the banks. The US government was trying to reduce the financial crisis by buying shares in the banks so that they can funds to the banks to increase their profitability. This led to a larger crisis since these banks used all this money in other risky investments, which later led to the loss of the money hence a big deficit to the economy.
A number of factors triggered this crisis. These are inadequate capital requirements where organizations with small capital took excess risk, there were inadequate incentives for banks to avoid engaging in excessive risk undertaking and there was inadequate monitoring by financial regulators (Batten &Szilagyi, 2011). A combination of these factors led to the financial crisis.Policy makers have taken the following actions to reduce the financial crisis. The first action is to set restriction on the amount of mortgages to give to individuals. This will ensure only viable clients are given mortgages with severe consequences to any defaulter. The other onebeing taken is to establish viable credit rating agencies. These agencies will provide information to the lenders on the worthiness of any organization so that only worthy organizations can get credit from banks. This might have adverse effects on adverse selection in that this information may not be reliable. At times,some organizations are deemed viable for credit yet they are not. These policies may have a moral hazard in that banks may decide to deny people mortgages on the ground that they are being regulated on the amount of mortgages to give. These people may be viable clients and others who are not viable are givenbecause they have been approved by the credit rating organizations. The aftermath of this financial crisis is the reduction of prices of commodities and increase in poverty levels especially to the developing countries (Cali & Kennan, 2010).
In conclusion, financial crisis is a world concern. This is because of the build- up of the debt both corporate and domestic. This has led to increase in poverty levels especially to the developing countries. Therefore, policy makers have the obligation to make excellent policies that will bring to a halt this crisis and avoid it recurring in future.
References
Batten, J., &Szilagyi, P. G. (2011). The impact of the global financial crisis on emerging
financial markets. Bingley, U.K: Emerald.
Calì, M., & Kennan, J. (2010).The global financial crisis and trade prospects in small states.
London: Commonwealth Secretariat.
Mason, OH (2010). Global economic crisis: Impact on international business. South-Western
Cengage Learning.
