Table of Contents
The financial crisis started from 2008 until the present time. This incident is considered as the most financial crisis happen in the world. This crisis is characterized by certain events, such as the collapse of small and large financial institutions. Another event is the fall of banking system in different areas of the world. Additional to this are the bailout of many banks by national government, and the low rate of stock markets all over the world
The financial crisis is a result of reckless lending practices by financial institutions and the growing of real estate mortgages in many parts of the world. The spread of credit boom in housing bubble is a risky lending practice. In some parts of the world, housing bubbles have also contributed to this global financial crisis. These result to evictions, foreclosures and prolonged vacancies. This, in turn, led to the failure of many businesses around the world.
The continuous flow of crisis may continually worsen. This rapidly develops and spreads into a global economic breakdown. The financial crisis is likely to give up the biggest banking from the savings and loan meltdown. Some of the businesses cannot obtain credit easily as they do before. Some of the people who had large equity in their home have nothing when financial crisis began. The problem is the loss of large amount for housing and large amount of stock wealth.
This global crisis also results in poor international trade, continuous rise of rate in unemployment, and slump of commodity prices. Additional reason in the continuous growth of crisis is the rise in asset prices, which result to extended periods of easily available credit, insufficient regulation or rising inequality.
AIMS and OBJECTIVES
The purpose of this research is to present the reasons for the financial crisis. Furthermore, this paper will show the major roles of financial products in the financial crisis.
In this study, the descriptive method is applied. To explain descriptive research, Creswell stated that this method is used to gather information about the present condition. This is more on describing what led to the financial crisis. The descriptive method will be used to verify and clarify the condition of the present situation. This method gives the researcher several options in gathering more data.
The financial crisis came unexpectedly and it was hard for the government to face this global crisis. Global financial crisis came out in the middle of 2007 and into 2008. Many of the institutions and businesses around the world have collapsed. Stock markets of different countries have fallen. And even the small businesses were affected by the global crisis.
The reason behind this is that some of institutional policies attempted to exploit market which caused the fluctuation of global scale. Market is a trade between two constituents who agree on the same price which create a supply and demand. These things are affected by the weather, the availability of the resources and some institutional policies. This is why the prices are also affected.
Interestingly, there were warnings before the financial crisis. One of these was the savings and loan disaster wherein 1,043 banks failed, costing taxpayers more than $100 billion. Additionally, several companies which were involved in corporate scandals resorted to dubious means to "deceive the public and enrich executives."
Spread of housing bubbles happened in any market. The reason why this bubbles continue to grow is because of very low interest. Some people believed that they have a good investment. Without enough regulations, banks sell mortgages in large bundles. They sell mortgages without checking if the person is capable of paying it. If the person is not capable of paying those bundles and banks realized that they have nothing to get in buying those bundles, they pull out their money. Banks have nothing to do with those mortgages anymore and they have no choice but to lose them. As a result, people stop buying and lending on them.
There is a reason why some banks get corrupted. It is because of Collateralize Debt Obligation or the (CDO). is a bundle of similar loans into single investments that can be sold or loan. This CDO is directly bought from the bank. Some banks put a lot of different mortgages in a single CDO. An investor who purchases that CDO will pay the whole exact amount of interest that made up CDO, but the risk is when the people did not pay back their loans, the bank will suffer for that. CDO has criticized because of its tendency to give risk to people who use it. CDO also the reason on why some part of the world has credit crisis.
On the other hand, Certificate of Deposit of Accounts is used to keep the money safe. It is considered as a convenient and safe way to keep the money for a longer period of time. It offers a high rate of interest, but on that regular savings account it offers a low rate of interest. The disadvantage of this is no withdrawal of money during the term of the account.
In some developing countries, the government protects its banks from bankruptcy by allocating resources. Reformation of banks will lead to economic recovery. Several banks and institution were uniting just to save their business while others seek help from their government just to save their institutions or businesses. On the other hand, some government let some banks go bankrupt. It is because some banks use the money for their own purposes. They use the money for their own good. Thus, the government chooses which bank they will protect from bankruptcy.
Meanwhile, financial derivative is used one wants to take more risk or reduce risk. It also depends on the contractual made by two parties. For the past years, derivatives were associated with some events such as the collapse of Barings Bank and Long-Term Capital Management. Also, derivatives had a role in the collapse of Enron. On the other hand, the share of stocks is a concept of derivatives. During economic or financial crisis, some businesses use this concept just to save their businesses. Due to financial problems, derivatives are part of the global capital market. The financial crisis leads to emergency interventions. National government implements some rescue plans for banks going down while other countries plan to retrieve their banking system just to save their economy.
Market instability was caused by many changes. Many financial institutions are left holding mortgage because people have no sufficient amount of money to pay. There is also another factor, which is the low-priced credit card. This makes the people to easily buy houses and make investments. Because of the demand, the prices will increase.
The crisis in economy reaches the end. Many people right now have lost their income and suffered because they have no work. Because of that, many of the people were forced to work with low-paying jobs just to have an income. Some people find solution by joining in a pay-day loan.
The continuous growth in the rate of financial crisis leads many people to a low quality of life. Many of them suffered for not having a good job. The economies of countries have fallen as a result of the financial crisis.