The financial meltdown that took place in 2008 is something that has taken place before in the past. The global economic platform has been affected by such crises from time to time and the one that took place in 2008 could be among others to come in future. There are a number of aspects that are noticed attributing this one to be the biggest since the Great Depression that took place in the 1930s, part of them being, macroeconomic issues, inefficient financial setups and issues arising from the implementation of policy.

The financial platforms existent have become too difficult to manage while the players are no easy task to handle. These centers of financial operation are hence hard to manage and supervise. Threats that arise from the systems are bigger than they were, additionally, remuneration policies were part of the risks.

Governments and major financial institutions have the duty of looking out for financial efficiency with a strong supervision and control of the financial markets and bodies. However, the major institutions that are charged with overseeing the financial operations were broken down into several bodies that bring about irresponsibility. The body charged with overseeing the operations did not uphold the change of financial markets. Additionally, the instance the financial bodies develop into huge centers when compared to the economy of countries, the public finances are left vulnerable to huge threats.

The main aim of this paper is to assess the reasons as to why, the financial crisis in 2008, took place. The focus on the paper would be based on the policies used by the banks and government and the response that they took place. This crisis has shown that costs that would accrue to tax payers and the relevance for nations to focus on supervision and regulation.

The Reason for the 2008 Financial Crisis

Introduction

In 2008, there were cases of wide spread uneasiness that developed to a global financial crisis that took place after the filing for chapter 11 by the Lehman Brothers in the same year. It was due to this that the world at large underwent an intense economic downfall.

The financial crisis took place in the American housing market. The prices went up two years earlier than fell by 30% noted as the biggest drop on a country basis in the US. The debt that accrued was too big as time went by and at the last stage of the crisis; the lending by low earners was on the increase at a fast rate.

Nations with ineffective economic basis were the most affected. Certain causes of the crisis arte noted in macroeconomic policies in the earlier years. Thought the failure by the financial models was the cause of this. These failures were due to poor financial bodies, the economic policies applied and absence of regulation.

1. Macroeconomic Causes

1.1. Low inflation and low interest rates

The past period was attributed with an irregular rise of macroeconomic strength. Gradual growth was integrated to low inflation in the economies that were fairly stable. There were a number of issues that brought about low inflation. There coming to being of post-communist nations to the trade set up was interpreted to mean a huge supply of cheaper workforce to the world economy (Adrian and Shin, 2007). In addition to fats development in IT, operations could be broken down and based in varied nations bringing about a change in world trade. There rose wide spread production that led to the drop of costs. This led to the rise in dynamic production tools leading to a feeble bargaining ability, hoarding of waging growth in advanced nations and dampening of local inflation burdens.

The change in the monetary policy model has been vital in the lowering of inflation. The integration of low and below par inflation had the impact that vital interest rates were low by past levels. This level of interest rates brought about cheaper houses through borrowing, the cost of prices rose this brought about debt.

1.2. Higher risk taking

The increase in demand for debt did not connect with the bank deposits. The finances had to be looked for in other areas. There were other financial set ups that depended on short period funding in areas where investments were for an extended period (Berkmen, e al, 2009). This led to liquidity on a greater level.

These low interest rates were a bother to investors. Treasury bonds brought about limited than guaranteed returned. The investors went for high risks for an improved result. There were others that took advantage of low borrowing so as to go for high risk asset. The increased desire for risk limited the threats in conventional fixed-income assets.

An indirect risk was most companies depended on short funding and an effective market. Liquid markets were given less consideration. A good number of companies and financial players were in intense financial pressure and banks could not lend a hand.

1.3. Growing Imbalances

For a great length of time, several nations hard shortages in account deficits. This case became worse in 2000. The account surpluses in the big companies were invested in developed nations. The demand increase brought about high costs, low bonds and returns. Hence, disregarding the positive impact of low inflation and interest rates, another impact was fast integration of debt (Reinhart, and Rogoff, 2008). The financial model led to risks that were not noted.

2. Financial Markets Causes

The financial meltdown took place in a setting that was extreme of development as well as macroeconomic imbalances, low interest rates and sufficient liquidity. On the other hand a well-organized financial base should be in a position to work in such a setting with no excesses. The interest rates were low and the cost of products rose (Berkmen, e al, 2009). The meltdown was hence as a result of feebleness of the financial markets that made risks rise.

2.1. Financial Innovations Increased Complexity

The financial bodies have developed with time. In the more advanced world’s, the absence of control of these bodies has brought about the creation of huge and complicated financial centers. The international markets have got to become incorporated with the capital flows and economies getting much share of global trade (Reinhart, and Rogoff, 2008). Financial innovations have been so tight to understand. These innovations took place with development in financial aspects and technical models present.

The development of securitization was commended by financial bodies as a mode of limiting the banking model risks. The intention of the securitization is to repack and sell the assets. The agreement prior to the financial crisis led to a risk that was diversified and applied in the international financial model.

The moment the crisis took place it was sure that the diversification of threats was not met. Credits of the books looked into were not there (Berkmen, e al, 2009). Additionally, the use of the system of lending stated that less incentive to use intense credit policies as the loans were for a short period of time.

2.2. System-wide Risks Underestimated

Progress in the financial markets has resulted to a susceptible market. Financial institutions are more reliant on liquidity in securitization and large-scale funding.

By themselves, the market participants are not in a position to handle risks when they arise. In markets that are not stimulated by self-preservation and results to the financial model to be less stable. The regulated standards were based on a stable financial center that reflected the health of the whole system. This looked down upon for a system-wide risk of innovations. The increase of the diversification led to application of securitization markets that led to high risks in the coming up difficult networks seen in the banks and market players. The implications were that the banks did not consider the impact of failure that spread to other systems. The other one was an extensive disruption and the market players declined to loan worthy parties.

The latter implication stated that market discipline did not make sure the control of systematic risks. While the other one stated that the disruption brought about market vagueness. An instance of the threats was that the actual sale was not acquired with regard to securitized loans. The loans were lower than the credit and therefore much affordable to the one issuing it. The liquidity ended in the melt down, took back the goods that migrated to the bank documents.

2.3. Inadequate Risk Management

Financial centers depended highly on information from the past as a sign of impending market performance. The operative macroeconomic setting brought about investors to ignore the probability of less happening evens. Risk systems were poor show of the manner market players would act. A good example is the value-at-risk framework (Bean, 2009). The model applied the price to measure the risk in the market securities, it brought about high financial markets to charge low price in better periods and accrued to herding methods of the markets.

Stress testing was insufficient. This method looks to make it possible for financial centers to look into the effect brought about by extreme happenings that are not seen by the risk-management frameworks. The method had a number of issues; liquidity shortage, and wide shocks among others.

2.4. Credit rating agencies failed to evaluate risks

The inability of credit rating companies and investors to assess and know the risks of the products extended the crisis. The credit rating companies looked to handle the operation of the global credit markets. In their allocation and monitoring of the credit levels, a big size of the finance goods was rated at the top. However, the method used did not meet the change in failures in the US housing scheme (Kanda, 2010). This process suffered a loss, the rating used were not in coherent with the risk that was stated by the products.

Moreover, with centered desires like credit rating companies dependence on issuers to incur their cost and the staff providing recommendations on the best way to get an efficient rating, the integrity of the rating was of in serious doubt. Additionally, the structured finance ratings played part to this. Credit rating companies applied symbols that were the same with the traditional fixed income securities, taking to fact that they did not have much past and comprehension of the planned finance goods.

2.5. Remuneration systems led to risk taking

Financial setting compensated tendencies that focused on lax underwriting and high risk taking that played a part in the risk taking. In precise, the financial bodies formed erroneous incentives for the staff by rewarding them with a loan. This led to the financial meltdown taking to fact that the lenders came from below par loans and sold on secondary market that issued the risk the receiver. A report by an Organization for Economic and Community Development stated that banks were keener on share development and growth of their incomes; this was through the securitization operation. As a reward to the staff to increase their production, companies regarded this added reward as having coming from loans as opposed to performance of properties (Kanda, 2010). This brought about payment with no regard to the quality of property. This payment similarly was with regard to limited time signs on the advancement of equity cost of the company and not lengthier tendencies.

2.6. Banks circumvented capital requirement regulations

The advantages acquired through securitization were the shifting of risks. These risks were in investors that had the desire to control it. Certain supervisors opted for securing since it limited the risks and allocated to the ones that need it. A small portion of people were aware of security loans that were connected to the banks. The credits were hence a duty of the banks, making them circumvent capital ratios so as to limit the capital needed.

2.7. Procyclical credit conditions

Progressive risks were created as time went by. The banks on the other hand were more courageous and loosened the policies on the credits. On the other hand, the pro-cyclical model brought about banks more leveraged in the successful period; this resulted to them being susceptible to a transformation in opinion. According to Adrian and Shin (2007), financial bodies improved their leverage in asset price advancement and limited their leverage in bad times. This in connection with pro-cyclicality led to heightening of the changes in financial trend.

3. Policy Implementation and Regulatory Failures

Governments and banks are charged with setting up stability in the local financial model. Certain causes of crisis are acquired in failures of regulation and supervision of the financial market. Moreover, some political choices worsened the lending.

3.1. Government policies lowered credit control

These laws that are formed are meant to elevate home ownership, the US was a good example that later went on to add to the crisis. A number of programs were put in place, issuance of down payment and skills in buying homes at cheaper price and certain families called for housing industries to come up with more buildings to house them (White, and Borio, 2006).

Later, the lender more and more often came up with striking forms of housing that make it possible for borrowers with smaller credit quality to meet their loan needs. Later an assessment of the loans rate of advancement revealed that there was no documentation for the revenue of the borrowers and that there was an increase of loan-to-value. In the period between 2006 from 2001 showed an increase of $215 billion to $1 trillion in loans (Haldane, 2009). This increase of need for housing was attributed to increase in cost, the moment it stopped it came to be an instance of crisis.

3.2. No one was aware of the system-wide risks

The models that were available in US and EU showed that there was no comprehension and efficiency. This was well known and the available structures; Basel group that supervised the operations in the banks had put in place measures to supervise the process and there were steps to form a division of labour in the supervisors (White, and Borio, 2006). Additionally, the efforts to come up with an integration association accorded awareness to the matter at hand.

The supervision process by the US banking was bisected into several groups; OCC, Fed and state controllers among others. So as to be in a good position to handle banks that have developed over time, there was needed to come up with frameworks that would manage, inform and divide duties effectively. However issues arose on the mix up of duties.

The EU ha the supervisory body bisected by the borders of the associates. The issue of the border association was noted at the time. The issue on work force allocation was in focus and the need to come up with an effective supervisory mode.

The EU had noted matters in advancing strategies for the financial operation. The setting up of committees was a way of handling it (Haldane, 2009; Jonung, et al, 2009). There was however issues in the management of supervision of the financial model that did not bring about difference prior to the crisis taking place. The outcome was not vivid for the system wide risks in the EU and they were ignored in the supervision of financial bodies. The supervisory body is now keen on being remade.

3.3. A lack of International Harmonization and Coordination

Regulatory models that were available in certain nations were in no position to be in line with the rate at which the global credit market and development of the cross-border banking. As stated there initially, the Basel Committee and other groups for global models for insurance and securities had well advanced themselves. Additionally there was the operation undertaken by IMF and Financial Programs where nations were made to be in line with the global standards and measures of ethical standards.

With the rise of the financial meltdown, it was vivid that the overseers did not connect well; hence the reaction applied was through an effective method. Notable as proof in the differences of the deposit assured models around the world as well as in the EU (Bean, 2009; Jonung, et al, 2009). The EU deposit target was focused at a minute form of harmonization. The moment the countries transformed their coverage in the process of the crisis there was a high form of improbability in the markets and threat on the regulatory arbitrage came to be.

The absence of a form of global harmonization was an issue in terms of the allocation of work force in the overseers when focusing on a bank under pressure. There though a way for them to manage the issue like the fall of LTCM that was well managed by the Fed.

Efforts were put in place so as to solve these issues that were the underlying the nations. Collaborative steps by the supervisors were put in place so as to acquire a lasting framework and a vivid work force; this was effective as time went by.

Similarly within the European body, there were bodies that were formed by the supervisors and banks. There were however other areas that were not handled in the most effective way. This was noted in the banks and ministries as well as supervisors (Kindleberger and Charles, 1996). This brought about the fact that the EU did not have reliable method for management of the banks and supervisors on financial firmness.

3.4. Supervisors were not conscious of the threats or skipping of capital needs

There was ineffectiveness in the control of banking. This was noted in the US market for mortgages. It has previously brought about threats in banking. These threats were not given any due consideration and consequently the securitized loans led to risky clients.

A notable force in the advancement of capital control is the application of financial methods that were used to evade. No financial body was able to completely note the threats connected to the securitization; hence limited capital was needed to block the threats.

Securitization was seen as a mode of altering the threats and brings about stability of the financial aspect. The committee in Basel noted that the supervisory body had intense risks that called for sufficient action; this was known as Basel II. The instance the crisis advanced it was not applied in the US; on the other hand the EU used the new policies as the Basel II was in operation (Adrian and Shin, 2007). The over sight body had a significant function in the escalation of the financial meltdown as the rise of credit brought about added capital if the credits were constant in the records.

3.5. Termination of Bank Operation

The banks are associated with certain operations with insolvency. It is a common knowledge that the falling of one bank would lead to the fall of another bank also known as the ‘domino effect’ that generally impacts the financial body. The fall of the banking system spreads to other banks.

This aspect brings about a winding act for the bodies (Norberg, 2009). Insolvency operation like the one un the US constitution take a lot of time to make it possible for an effective winding up with no negative impact of a spread. The absence of reliable processes in number nations has left government s to lack choices to help insolvent financial bodies.

4. Conclusion

A number of issues added up to be the cause of the crisis. The macroeconomic setting that took place played a role in the variation of the financial setting in nations like China and the US. China had an extreme saving funded the shortage in the US with no interest. Globalization and production development in certain financial bodies lowered inflation. This, in addition to monetary policy, stated that the interest rates were low. This level of the interest rates in conjunction with the liquidity brought about credit rise in the market. An ignorance of risk increased the development of the financial body and led to an unstable financial model. This improbability was brought about by a number of things. Rating companies were not in a position to evaluate the risks connected to the financial bodies. Pro-cyclical levels advanced the credit rise in a single course. Additionally, precise policies that involved the rise of home ownership led to the rise of mortgage market, this showed that there was a drop in credit management.

Governments and central banks have the duty of keeping stabs on a stable financial system with supervision and control of the financial markets. On the other hand, the supervisory framework in a number of areas was broken down bringing about the lack of duties for the system-wide risks. The over sight models did not stay in touch with the rate of change in the financial markets.

Initially, governments have demonstrated their readiness to help banks so as to acquire back their stability. This was since there are a lot of complications in unwinding banks that are connected with intense distortions in the markets as well as the economy in general. This brought about an implied public assurance to creditors of the banking industry that will not bring about damages. This has brought about an assurance to the creditors and shows that the financial institutions are not to incur any loss. The met down that resulted was a manifestation that taxpayers and the law making bodies were no conscious of issues and led to issues on accountability.

References

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