Literature Review on Global Financial Crisis

Literature Review:

The current financial crisis which has swept across major economies of the world is considered to have its roots in the US economy. Economists and analysts have argued that financial regulators should be blamed for not doing enough to avoid the current financial crisis. It was due to weak monetary and fiscal policies of Federal Reserve and poor visionary approach and negligence of Securities Exchange Commission, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission and Federal Housing Finance Agency that led the US to its worst financial crisis after The Great Depression in 1929.  Furthermore, the crisis is much to be blamed for because of the over confidence of investors who did not foresee the warnings which economic system gave and had a myopic view of the weakening conditions in the credit industry which eventually led to huge crisis in the subprime mortgage market of the US.

The collapse of subprime mortgage markets has been due to three major reasons which are identified by Jain as continuing low interest rates, greedy banks & mismanagement of derivative markets and above all beyond control lending by banks to creditors in the housing industry (Jain 104) which reached $10.143 trillion in the year 2007 (Federal Reserve Bank) . Over recent years the housing industry experienced rising price graphs and attracted investors which led banks to lend funds to even those who were credit-unworthy. Banks reached exposure up to 70% of their capital and slow or no repayments of these high risk subprime loans became a credit problem for them. This eventually led to collapse of large house financing companies such as Fannie Mae and Freddie Mac (Kirchgaessner and Sender). The liquidity crisis came after credit crisis which sucked out the liquidity from financial institutions and investors pulling their funds from the capital markets caused panic in the market. Despite of the interest rate cuts by Federal Reserve Bank and other interventions by the government to support ailing financial institution the liquidity crunch could not be avoided (Allen and Carletti). The initiatives by the government is largely contained the possible outbreaks of the financial crisis however there is still much to do as spillover from financial sector is depicting  poor forecasts for the coming months.

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