FINANCIAL CRISIS Financial Crisis

Financial Crisis

Introduction

The possibilities of a very serious financial crisis had already warned Raghuram Rajan in 2005 in a publication presented on the occasion of a tribute to Greenspan. "The outbreak of the 2008 financial crisis can be fixed officially in August 2007. It was when the central banks had to intervene to provide liquidity, "according to George Soros. It is true that the beginning of the crisis date back to mid 2007, with the first signs of the difficulties caused by the mortgage sub-prime. In late 2007, the stock markets of the United States began a precipitous decline, which worsened severely in early 2008 (Steve & Chris, 2007, 54).

The confluence of other events of particular harm to the U.S. economy (rising oil prices, increased for inflation, stagnation of credit), exaggerated the overall pessimism about U.S. economic future, to the extent that the Stock Exchange of New York succumbed daily 'rumors' financial statements. Many believe that this was what precipitated the abrupt fall of investment bank Bear Stearns, who previously showed no particular signs of weakness. However in March 2008, within days was liquidated on the open market and later in an unprecedented move, the Fed manoeuvred a 'rescue' of the entity which ended up being sold at bargain prices to JP Morgan Chase.

The global financial crisis shook the international financial system around the globe, and its repercussions are still being felt globally. Owing to its severity, it has been labeled as the worst crisis since the Great Depression. It is now, more than ever before, clear that the current financial system is not stable and that the invisible hand is not doing what its proponents claimed.

Why was there a financial panic? The blowup is easy to understand. Many firms faced a crisis of their own creation. Subprime mortgages were often held in fragile special purpose vehicles (SPVs) funded by rolling over short-term debt. Legally separate SPVs allow banks to buy certain assets without having to put up capital. The structures were designed to hide risk and to go around existing law (Here again, the regulators dropped the ball.). When the mortgages lost value, the short-term debt holders refused to renew their loans. This led to forced liquidations at depressed prices. Big trading losses brought on the credit crisis (Sakbani, 1985).

Discussion

The financial crisis of 208 imposed significant monetary pressures on the world financial markets including UK as a dominant affected among these. The UK banks cannot recoup their loans by selling the homes because the value of them dropped and became less and the loan amount. This creates losses for these banks. The securities sold in the financial markets saw their value drop. This creates losses for financial institutions who bought them (Ho, 2007, 39-59). Which created the subprime crisis and a freeze in financial markets?

On the other hand, the United Kingdom, increasing real estate allowed people to obtain new loans. For example, someone bought a house ...