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A financial crisis can be described as situations that are experienced by financial institutions and assets whereby they experience a loss of value suddenly. It is easier to notice different businesses and organizations across the globe that has faced different financial crisis situations. Whereas financial crisis is common among businesses and organizations, different economies across the globe do experience this crisis. With this in mind, the 21st century experienced one of the worst financial crises since 1930s that was named the great depression.
It is important to understand the fact the recent financial crisis began in the United States and spread across Europe and to other parts of the world such as Asia and Africa. Notably, understanding the existence of a financial crisis alone does not help in any way. One need to understand the causes of this crisis too in order to be in a position of formulating appropriate measures that could then be applied to deal with future challenges. With this in mind, there are different reasons or rather causes of the recent financial crisis that have been cited by scholars and researchers.
Research Findings and Discussion
To begin with, it was found out that the bust and boom in the housing market was one of the reasons why there was global financial crisis across the globe. Remarkably, there were low interest rates across the United States that spurred foreign funds inflow (Kunreuther and Useem 157). More Important is the fact that this inflow of funds created an environment whereby lending conditions were lessened. As a result, most American obtained their home on debt while other ventured into mortgage business.
However, along the way, due to a high supply of houses, there was a drastic reduction in the overall prices of these houses leading to massive losses among them. This created a financial problem in the US. However, it is also important t understand that there was a spread of these losses across the globe since different investors from across the globe had joined the American people in investing in this business. As a result, when the US economy went down as a result of their inability to control their investments into buying home, other nations too were also affected.
It is also important to note that the government policies played a critical role in creating the recent financial crisis (Kunreuther and Useem 158). It was found out that whereas different regimes in the United States had failed to initiate a plan that would lead to the acquisitions of houses by the American people, the government failed to put in place critical policies that would deal with any negative consequences of this investment, especially in regard to lending and borrowing as a source of funding houses of that had been build. The failure by the American government to foresee a problem in the model that was in place led to the destruction of different financial institutions across the globe leading to a financial crisis that affected the whole global financial institutions.
In addition to the above factors, it was found out that there was a substantial increase in financial institution incentives and debt levels. The period between 2004 and 2007 saw a tremendous increase in financial debt or rather lending (Kunreuther and Useem 156).
In consistent with this, the loans that were offered by the financial institutions were invested in Mortgage-Backed Securities, MBS with the hope that the prices of houses or on the other hand demand would continue to rise. However, supplies too of houses rose to a critical level leading to a substantial loss of value. Thus, most investors were unable to pay back their loans or rather debts leading to financial crisis as financial institutions had no way of getting back their money. On the other hand, whereas in some cases these institutions were guaranteed to get back their money, this would probably take longer than anticipated which in some cases created a platform for loss of value of the original amount that had been given out. With massive investments both from within the American society and global investment community, avoiding a collapse of the financial institutions across the globe was inevitable.
Additionally, it was found out that every new invention that created an opportunity for investor to make new investments was recipe for a financial crisis since there were no clear ways that one could use to ascertain the risks and the future of a particular investment (Kunreuther and Useem 157). Since there had not been there a situation whereby there was a boom in the mortgage business, it was difficult to determine whether the future of the current investments were secure. This was particularly worsened by the fact that most investment analysts depended on the ability of the market to regulate itself rather taking a step of confidence and setting down policies and regulations that were meant to guide the investor and avert any financial problems. Consequently, people invested heavily in mortgage without really being in a position to foretell the future or rather stability of their investments.
Whenever one falls, one has to stand up, wipe himself and continue with the journey but work on averting situations that could lead him to fall again. Therefore, there are different recommendations that can be made in order to avert global financial crisis in future. In this respect, the government has a responsibility of creating an environment that is favorable to its investors while at the same time examining the risks that its investors might face in the short-run and in the long-run. It is worthy to note that whereas the most affected nation was the United States, there was a link that other nations had attached to the US that led them to be involved in the crisis thus severing their economies. In reference to Great Britain: Prime Minister's Office and Hm Government (2009), there is need to regulate the cross border financial sector as a remedy to financial crisis trends that have been found to spill over to other nations that are not necessarily involved in a particular financial crisis (96).
According to the Commonwealth Secretariat (1999), there is need to give priority to crisis prevention containment measures because of high economic, social and political costs of financial crises and the speed with which they can spread through contagion and become worldwide debacle (13). This can be done y laying down appropriate financial indicators that would help both analysts and investor to examine their position in any investment scheme while at the same time having a look at the future of such an investment.
This will prevent the aspect of making decisions based on heresies but rather on facts.
In summation, it can be argued that the recent global financial crisis was the worst to be experienced in the last fifty years. However, human decisions that were spurred more by excitement rather than investment facts are cited as the major cause of this financial crisis. More so, the mortgage boom between 2004 and 2007 created an increase in the number of investors that wanted to invest in the housing industry. On the other hand, financial analysts depended fully on the market forces as the regulator of the activities that were conducted in this market. However, it was already too late by the time they realized that there was a crisis that could not be prevented. In spite of this, financial crisis could be averted if at all appropriate measures are instituted in place to monitor financial indicators in any particular economy.