FINANCIAL CRISIS

The Financial Crisis of 2008 Was Not a Case of Markets Failing;

Instead It Shows How Markets Ultimately Rectify Their Internals Shortcomings



The Financial Crisis of 2008 Was Not a Case of Markets Failing; Instead It Shows How Markets Ultimately Rectify Their Internals Shortcomings

Introduction

The United States of America's financial crisis of 2008 initialized with the collapse of the real estate market. This sparked an after effect which became the global economic crisis. High costs were borne by every society, job was lost in the millions, and wealth was eliminated. The turmoil caused people to lose faith in the financial system, theory, and free enterprise (Andrew 2009, pp. 4-43).

People are very aware of the crisis that was faced by the nation with the primary issue of failing markets. The key aspect to analyze is how the financial market responded to those internal shortcomings and provided solutions to the crisis. Some suggestions and implementations of resolution include raising capital requirements for services in the financial industry, limitations on commercial banks regarding proprietary trading, new compensation system for bankers who minimize incentives to take excessive risks, reestablishment of fiduciary duty principle, protection for consumers against financial products that are defective, transparency in derivatives, and the creation of a systemic risk moderator who is isolated from political and business influence. The key aspect that most companies and stakeholders commented was on the theory that regulation is not the problem with financial markets but rather there is a higher concern for effective regulation (Bondt 2010, pp. 137-156).

Discussion

Capital requirements in the USA need to be raised for financial service firms. These include private equity funds and hedge funds. The leverage level that a company can undertake should be restricted. When there is a situation with leverage, an option for the bank should be required where long-term debt can be issued by the bank and can be converted into equity when liquidity shrinks. Another idea is that bank capital reserves should be counter cyclical and be consolidated to that one firm. This possibility is focused on the fact that financial institutions have large off-balance sheet liabilities and assets while taking advantage. In this situation capital requirements are meaningless (Bondt 2010, pp. 137-156).

Another possibility is the countercyclical bank capital reserves (All entities that belong to one financial firm should be consolidated. Otherwise, with large off-balance sheet assets and liabilities, capital requirements become meaningless). Recently US regulators are going to be implementing a double requirement of minimum capital for the biggest banks. This is primarily to reduce the dividend payments that these companies are making. This development would make the capital value required higher where lenders would have to hold onto at least six percent of the total assets. This is also determined regardless of the risk exposed (a value twice the amount set by global bank supervisors). The Federal Deposit Insurance Corporation and the Federal Reserve are implementing this figure for the largest banks due to pressure faced from ...