Financial Crisis and Greediness

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Financial Crisis and Greediness

Spitefulness and irregularities in the Lending segment principally contributed to financial crisis and the current global downturn making it unfortunate to realize that undependable actions have become the root for economic growth and expansion. The global financial crisis has affected both people right from the top rich billionaires to the regular individuals although time bomb in the financial crisis and probably what was experienced was just a detonator but not the main problem as may be expected. Several countries and financial institutions leadership failed to recognize that the issue was really great thus leading to application of a band aid on a major wound such that at the onset of the credit crunch, the responsible institutions assumed that everything was fine. This writing clears the air on the causes of financial crisis and particularly the part played by the banking sector.

Significant number of people lost their houses due to mortgages that were in default and it was shocking to see the central banks permitting prolific lending to unrated individuals. The individual borrowers could not afford or service the loans that they were receiving. There was a lot of politics in this crisis since it was through the political actions and influence and the financial institutions that the crisis occurred. US is actually the biggest economy in the world and has created the dollar as a planetary currency thus giving it opportunity to stir most economies globally and therefore most petroleum producing countries that deposited their huge sum of money in the USA banks prompted them to lend to the needy people.

Surplus funds led to cheap loaning and borrowing encouraged individuals especially the middle and low income earners to borrow and this stretched the income earned by these classes of people thus leading to payment default. It was undeniable that the financial institutions and banks have their own crises because they could not regulate themselves and therefore institutions were driven by urge to create more money from the surplus that they had. Financial institutions should have followed the set rules of borrowing and lending without overlooking any of the rules and it was indeed uncaring and greed that guided the institutions towards the global financial crisis (Hillinger Web).

The Financial crisis was mainly contributed by the contemptible, unsecured and unrated housing loans given by banks to their clients and this was exceptionally evident when they refused to take responsibility of their unsecured house loan by packaging them into a collateralized debt obligations and selling them to other agencies. The agencies did replica of what banks did by passing the loans to other agencies thus spreading them as assets globally without thinking of possible outcomes making one to feel that there must have been a huge and dangerous assumption made by the banks and the agencies (Jovovic 67-72).

Interest rates worryingly went down accompanied with an immense increase in house loan made it easy to acquire house and build their own homes thus appreciably leading to increase in land prices. Building and construction activities were everywhere thus creating more jobs and wonderful income in the real estate business and the low mortgage interest saw several banks greedily competing for clients thus motivating people to borrow even more than they could actually be allowed to under normal legal circumstances (Mittnik et al 258-265).

Fascinatingly certain families borrowed to service the old loans and remain with the surplus for vacation or acquisition of more assets and investments such as investing in a second house and the central of the economic crisis began when the loans went to the rates below the prime rates of banks. Unprofessionally, the banks never bothered to analyze the financial credentials of the borrowers specially their ability to repay the loans and they did not further provide the borrowers with sufficient information about the loans particularly when they gradually raised the interest rates. Insufficient information and the rise of interest rates made some borrowers incapable of servicing the mortgage thus leading to series of default cases which led to bursting of a bubble that the mortgage hedge fund as well as some institutions was in real troubles (Goczek 30-35).

Hitches spread to the other agencies where loans had been transferred by banks and on some investment banks thus triggering huge financial institutions such as Citigroup and Merrill Lynch to announce write down. The low interest rates were worsened by the reduction of the federal funds rate which translated into lower mortgage rates causing the banks to borrow at lower rates hence charging lower interest on mortgages. Banks thought that with the skyrocketing of land prices, they could probably seize the houses in case of any default and sale them handsomely without analyzing the ability of borrowers to repay their loans (Goczek 30-35).

The most important issue was the number of borrowers instead of the characters and ability of the clients to repay loans because they simply wanted more money without even thinking of possibilities of bad debt by focusing on profit opportunity. Apart from publications by many economists on the possibility of unsustainable nature, no action was taken to curb the low interest rates and the US government intervention wreaked havoc on the financial systems particularly the regulation of the financial industry largely contributed to financial crisis (Mittnik et al 258-265).

Financial crisis conceivably could not have been wide ranging as it was if the government could have come up with effective, efficient and proactive rules governing the financial institutions. Capitalism and inherent greed can be blamed to have caused the financial crisis by sickening the housing market and allowing pool of dangerous investments although the Federal Reserve could have taken control of the rising situation. Provision of cheap home mortgages was solely done by the government interventions with an intention of making home mortgages more available to the needy and it was backed by both democrats and republicans unanimously without focusing on the future effects (Jovovic 67-72).

Government brain-teased banks with spiteful enticements and unmerited intercession to offer mortgage to less creditworthy individuals and this greatly plunged the banks into undeniable risk of bankruptcy perhaps they could have not involved themselves in this unnecessary, risky and reckless behavior. Perceptibly, the allowable coercive support of credit policies by the government in home mortgages have led to moral hazard and greatly contributed to the financial crisis. Sponsorship of corrupted loaning standards in home loans was pooled by substantial political monetary incentives to encourage the bad loans led to a skyrocketing default rates on subprime mortgages (Hillinger Web).

Banks and other financial institutions would have snubbed the government proposals by avoiding the shadow banking system since issuing of poor quality loan is inconsistent with the lending principles. This unfortunate financial crisis could possibly been avoided by the stern observance to the guidelines put in place. Consequently, ravenousness and imprudence within the Banking sector is blamed for the financial crisis that hit many great firms locally and globally such as the AIG and the General Motors.

Works Cited

Goczek, Lukasz. “Federal Policy Responses to the 2007-2009 Us Credit Crunch.” Equilibrium 6.3 (2011): 27-42. ProQuest. Web. 3 July 2013. <http://search.proquest.com/business/Docview/1318039265?Accountid=45049>.

Hillinger, Claude. “The Crisis and Beyond: Thinking Outside the Box.” Economics 4.23 (2010): 0_1,1-61A. ProQuest. Web. 3 July 2013. earch.proquest.com/Docview/757449055?Accountid=45049

Jovovic, Radislav. “Global Financial Crisis: Role of International Institutional Framework, and Lessons for Transitional Countries.” Montenegrin Journal of Economics 8.3 (2012): 65-73. ProQuest. Web. 3 July 2013. <http://search.proquest.com/Docview/1329186977?Accountid=45049>.

Mittnik, Stefan, et al. “Financial Market Meltdown and a Need for New Financial Regulations.” METU Studies in Development 36.1 (2009): 253-69. ProQuest.Web. 3 July 2013. <http://search.proquest.com/Docview/89155174?Accountid=45049>.