Financial Crisis

Financial Crisis

Introduction

Financial crisis is considered to be such a situation in which the money supply is generally reduced as compared to the demand for that money. By this it is meant that the liquidity of the money is quickly vanished as the amount of money that is available is withdrawn from banks, which force the banks to either sell other of their investments in order to cover up the shortage. For decades, U.S. has had the largest economy in the world. But even the strongest economies struggle sometimes. Throughout its 232-year history, the country has endured several recessions' periods of economic contraction and declines in business activity. Some of these economic downturns have been mild, lasting as little as three months. Others have been severe, lasting for years and resulting in widespread unemployment, bankruptcies and even social unrest. As of early 2008, the U.S. finds its economy sluggish. Business growth slowed to a near standstill, consumer confidence deteriorated, U.S. dollar weakened in power as it has been in 17 years and the country is losing jobs (Ibis World, 2012a). Many economists say the combination of these factors makes it clear that a recession has already begun.

The main motivations that are covered in this paper are the real effects that occurred due to the reason of financial crisis, in particular within the sector of corporate investment. Also the role of the internal resources that is cash that was observed during the shock of supply will be discussed in this paper. This paper includes the information regarding the non-financial firms and their cutting in investment that was followed by the inception of the crisis especially when they have much lesser amount of cash on their hand. This financial crisis also led to the limitation on the external financing method. Some other evidence that has any kind of interaction, especially in-between the external and financing on cash basis are also dependent.

Literature Review

The main causes of current financial crisis occurred in the year 2001, when the stock market was suffering substantially from the bursting of the "dot-com bubble," in which Internet-related stocks with no real value traded for large sums of money. Additionally, the terrorist attacks of Sept. 11 placed a great strain on the economy. To combat the sluggish economy, the Federal Reserve, which regulates and influences key interest rates, lowered rates significantly, that made it easy for some of the financial institutions to have a loan of money from both the government and each other (Mergent Investor, 2012). Taking advantage of these low rates, many financial institutions, including mortgage companies tied to some of the nation's largest banks, began making loans with extremely low introductory interest rates. These companies also became far less concerned with customers' credit histories, lending money to so-called subprime borrowers who might have great difficulty making mortgage payments (Sun, 2011). This research presents an analysis of financial crises and its linkage with bank failures by focusing on the article “Financial crises and bank failures: A ...