Financial crisis Essay Example | Topics and Well Written Essays - 1000 words

Financial crisis - Essay Example The global north was after this period walking on a financial tight rope. With the resource utilization reaching the maximum limits compounded further by a relatively high wage rate, most enterprises were feeling the pinch in the reduction of their rates of return. There are also indications that the credit crisis began in the developing nations that had began to experience financial turbulence in the early years before it eventually impacted the giant economies like the United States. With respect to these revelations and more, this paper therefore examines the causes of the credit crisis that affected the world and which its effects are yet to be fully mitigated. This essay will closely look at the major influencing factors in the global economy and that of the United States that led to the credit crisis that was experienced in the year 2004. As a precursor, the two major reasons for this crisis were internal policy framework and external influence as discussed below. Deregulation: Shadow Banking and Mortgage Securitization The main internal factor was that of the policy instruments by the government that led to further instability in the financial sector of the economy that was already unhealthy. The period before the crisis was characterized by a highly capitalist tendency that favored lack of regulation in the financial sector. Blundell-Wignall, Atkinson and Lee (3), state that by the year 2004 there were four key crisis-causing factors that came into perspective. First, the then president’s policy of making mortgages cheaper to low-income household. Secondly, the increased restriction of the sole mortgaging authority that made banks venture more into the sector and thereby increasing low value lending. Third was the publication of the Basel II accord that encouraged banks to get involved in other non-trading activities. Finally, the investment banks were given more freedom through ‘consolidated entities program’. In effect, this led to instability of economies mostly in the northern parts of the globe that depended highly on export surpluses. This created some sort of instability as Kapadia and Jayadev (35) indicate. They further state that the creation of a benchmark of currency and the isolation of the United States’ consumption sector as the last in consideration when exporting resulted into instability in the world economy. The effects of deregulation were mostly felt in the banking sector. First, the impact of disallowing the regulations that stated that demand deposits accrued interests. Secondly, the mortgage interests with relation to residential properties were lowered creating a boom in the housing sector through increased mortgage lending. Lastly, the deposit taking institutions were allowed access to the Federal Reserve through a credit window that in turn allowed non-banking institutions into the financial market that was already unstable. It was therefore inevitable that deregulation was boun d to create ‘indiscipline’ in the financial sector and that was the case. For instance, lack of proper monitoring of the banking institutions was creating an environment prone to unscrupulous deals that amounted to lose invested funds that created a recipe for future collapse of the whole lending system. Moreover, the mortgage sector was also affected