Credit Crisis of 2008
- Hits: 3476
Credit Crisis of 2008
The credit crunch of 2008 was the greatest downfall for some of the greatest global security markets and economies. As compared with the great depression of the 1930s, there are very high possibilities that this credit crunch of 2008 and the turbulences that resulted in the securities markets may have a greater potentiality in altering the governance and structure of financial markets in a very great manner. The intensity of this credit crisis is what poses the greatest risk here. Looking at the origins of the crisis, it can be traced back to shifts in both geo-political factors and the measures that had been undertaken in solving some of the previous serious financial security market crisis that were being experienced before 2008 (Malone & Gray, 2008).
The major contributor to the crisis was the global imbalances of trade, which occurred as the Asian creditors suppliers lend to the western countries who had a seemingly high insatiable appetite for entering into debts. This created the greatest barrier of liquidity which may not be easily altered. The other factors that played a major role here was the decades speculative bubble in the running up in internet and technological related equities. The business crisis following the terrorists attacks on the World Trade Organization, and the increase of monetary authorities which ended up cutting the interest rates by over one percent. There was also the massive pool for cheap liquidity that had been created. The financial institutions since then tried to use the existing cheap liquidity so that they can easily ramp up their flawed balance sheets (Mishkin, 2008).
Possible Alteration in the Structure and Governance of Financial Markets
After the credit crisis, there would follow turbulences in securities markets. In order for these financial markets to be able to solve the issue, they tried to deploy liquidity mechanisms through pursuing more investment opportunities (Ball, 2008). In return, the Asset Backed Securities, ABS, decided to offer the investors higher yields through giving them high rated assets in credit. However, it occurred that the growth in securitization altered the structures through which the lending processes were being done. Previously before the crisis, all financial market institutions that had originated from mortgages used to carry a considerable proportion of assets on their balance sheet. Therefore, should the quality of the asset deteriorate, it means that the originating company or institution will definitely have to incur a loss (Blyth, 2008).
From the nature of this credit crunch, it is very likely that it may end up bringing about farther changes in the governance and structure of today’s financial markets. This is as a way of trying to solve some of these issues which may deepen the impacts of economic recessions. Because of these unfolding market credits crisis, they have been able to reveal great evasions in the regulatory frauds and controls and frauds that have not been visible within the buoyant markets. After the crisis, there have been increased international trade and international networking among regulators and they regulate in order to bring a convergence in the regulatory standards and by so doing create common spots in dealing with the issues. Through mechanisms of reshaping different sectors in the economy, there will be changes in the structure and governance of the financial markets as part of regulations (Ball, 2008).
If this crisis is in any way to be compared with the great depression of the 1930s, it will be realised that the current existing turbulences will have greater impacts on the financial markets more than we can think. Since the future for different global economies is something very important, the nature through which the crunch came in, and the following turmoil, it is quite clear that different experts will have to be involved in making complex decisions which will end up changing the structures and governance of financial markets. The main need for this change in the structures would be pioneered by this great need of adapt to new mechanisms and management operations which are led in a democratic way to avert any possible credit crunch. There would also be the need to apply a different political strategy which would steer these financial markets to the right direction (Lindgren, 2009). It has also been suggested that the past regulations within the financial markets had been dominant-oriented which played the discourse hence resulting in the bursting of the credit bubble. In simple terms, what this means is that there have to be a shift in the regulatory systems in the financial markets as an oversight responsibility in bringing about credibility with the independent agencies, the government bodies and other financial market practices. This would be the only sure way of bringing accountability to all the markets.
Due to the crisis, I project that there will be increased government takeovers on these financial markets so that they may have the appropriate operations which will prevent a similar occurrence. This will give the relevant mentorship and interventions hence bringing a new breed of management operations and structures. This will bring what is known as regulation of financial markets. As experts say, this issue of regulation of the financial markets, which will definitely result in changes in the way the markets are governed, will be one of the necessary tools for restoring public confidence within financial markets. This aspect will prove quite appropriate in a world healing from the wounds of the 2008 credit crunch. In order for the original free-market to be re-introduced, this government intervention and regulation is necessary in order to ensure the trust within the public is re-established. Someone why then ask how these structures will change in the financial markets. The effective regulation will have to ensure there is maximum supervision which monitors the operations and governance of the markets. This supervision will thus be based on real-time and maximum examinations on how any kind of crisis is monitored and addressed within the markets. Also, there will have to be the maximum involvement of safe and sound financial regulations. This will only be achieved through giving a clean sweep to the markets (Peirson, 2008).
The government interventions will also ensure that there are restrictions on how leverages are used. From the crunch, it will be noted that one of the causes was from the excessive leverages which brought unnecessary backstops for the financial-service operations within the financial markets. This will also ensure that these markets will have to allocate the appropriate capital which will be used as reserve prior to a possible similar crunch (Robbe, 2008). This new regulation for financial institutions will be applied so that it serves both the customers as well as the community. However how much this may be contested, it is only with this change that the markets will be in a position of restoring their confidence to the clients. This will bring in the aspect of safe and secure financial operations which does not just take advantage of customers without caring about their future. It will be agreed that the crisis must have been a necessary occurrence to the globe so that it would unmask some of the weaknesses that had existed in these markets. This means that different governments would have the calling to restore sanity and confidence in the financial systems so that excessive loses and risks may never be experienced in the coming days (Madura, 2009).
With the crisis, it has also not been able to carry out an attractive international trade. This is so because majority of the developing global economies have been greatly relying on trade finance which is offered through these financial markets. This is in relation with loans which are used in transactions within the diverse global markets. Having seen many banks and financial markets falling out of cash, it has occurred that these loans are no longer coming by as they used to. This means that there will definitely have to be a clean sweep in the organizational structures of these financial markets (Robbe, 2008). These changes will have to take place in order to facilitate international trade which will greatly absorb the shock faced with the global economy. In many nations, trade finance has been seen as the most secure finance mode, and thus failure to institute changes here will automatically result in further economic meltdowns.
It will therefore not be questioned why there have to be appropriate changes with these financial markets. Looking at the crisis, it will appear that it was from weaknesses experienced here that it was not possible to prevent the crunch. The World Trade Organisation has for the last one year been trying to come out with statistics that will show the extent to which this crunch may have impacted on the international trade. This is very necessary since over ninety percent of all international trade has always been financed through short-term credits from banks and financial institutions, and this is something that has been hard to get with the crunch (Robbe, 2008). Having come up with the information that international trade had been highly affected by the crisis, it came up with suggestions that different regional banks should take over some of the credit roles given by some of these financial market lenders.
Derivatives are also known to play a very big role in financial markets. Since it is very true that the turmoil caused by the 2008 credit crunch will have to result in changed structures and governance with the financial markets, there will be the inclusion of regulatory gap. For instance, the use of credit derivatives with the new structures of the markets will definitely reduce some of the counterparty risks to the clients. This may also integrate electronic and technological netting systems among the users of these markets, something that has not been happening before (Samet, 2008). We will therefore agree that the use of derivatives can be one of the possible changes that may introduced in these markets since they are important financial instruments which gives people the right option in buying or selling a give security at a given date and at a given price. This will ensure there are no unpredicted shifts and twists in the financial markets. Once all these changes have taken, it will most likely occur that there will be the encouragement of well functioning banking systems so that a possible crunch may never take place again. It will hence occur that current financial markets will be required to work under the umbrella of well functioning banking systems. These systems will be necessary because they will be used in improving the sharing of risks with these financial markets. This will be achieved through provision of liquidity.
With appropriate monetary authorities, it is very possible that most of the factors that may have resulted in the credit crunch may not have occurred. Because if the crisis, the chances of having a lot of changes in the structure and governance in the financial markets will bring about monetary regulations. Monetary authorities are applied in regulating the supply of a certain currency and through it can be easy to set the appropriate interest rates. This will have to be changed through the central bank through most of its executive branches (Murphy, 2009). This will in the very end result in changes with the financial markets. With a well functioning banking system, it is very true that it will be possible to solve most of the issues faced by these financial markets and in future prevent a suburb credit crunch.
Therefore, it will call for fundamental reassessment for all banks and business models so that different economies can properly be able to address the current credit crisis. This has resulted in a number of policies which will be applied in governing most of the operations in the financial markets. A number of experts believe that it cannot be possible to address this burning issue without giving the necessary planning with the financial markets so that their mode of operation may as well be changed. The experts have also proposed for a non-operating financial structure as one is an essential ways of imposing a leverage ratio (Lindgren, 1999). It will hence be agreed that the credit crisis of 2008 has been a benchmark through which different future governments will give reference to in order to make the necessary interventions towards the financial markets and systems so that a similar event does not repeat itself in history. Then, due to this turmoil in market securities, a solution may as well be found through implementing laws and practices which would govern all financial markets following the credit crunch of 2008.
In conclusion, the credit crunch of 2008 caused a lot of turbulence in different sectors of the economy and especially with security markets. This is because different global operations like trade and politics were as well affected by the crisis. In comparison, it is true that this turmoil has very greater capabilities of altering the fundamental structures and governance of current financial markets. Comparing it with the any other event that may have affected the global economy since the great depression of the 1930s, it is very clear that the current projected changes will be unrivalled by any of the predecessors. The reason why these changes are necessary is to ensure the previous weaknesses that must have led to the crisis are addressed and ensure that the occurrence does not repeat itself in future.
Ball, L. (2008). Money, banking and financial markets: Oxford: Worth Publishers.
Blyth, M. (2008). Great transformations: economic ideas and institutional changes in financial markets: New Jersey: Prentice Hall.
Lindgren, C. (2009). Financial Sector Crisis and Restructuring: lessons from Asia: New Jersey: Prentice Hall.
Madura, J. (2009). Financial Markets and Institutions: Cambridge: Cambridge University Press.
Malone, S. & Gray, D. (2008). Microfinancial Risk Analysis: London: Allyn and Bacon.
Mishkin, F. (2008). Financial Markets and Institutions: New Jersey: Prentice Hall.
Murphy, D. (2009). Unravelling the Credit Crunch: Oxford: Oxford University Press.
Peirson, R. (2008). Business Finance: Oxford: Oxford University Press.
Robbe, J. (2008). Secularization law and practice in the face of the credit crunch: Cengage: Cengage Learning.
Samet, J. (2008). Recent Developments in distressed debt, restructuring and workouts: Malden: Blackwell Publishing.