How the Financial Crisis Spread Over, Origins and Possible Solutions
By Ilia Gogichaishvili
In spite of still some obscurity, now there is an international agreement of economists that the sub-prime mortgage market failure was the main reason for the ongoing financial crisis. This failure was caused by the boom of credit loans and presence of unjustified lending practices. Lending standards tended to decline when the credit boom had an upward propensity. Afterwards, high credit rates and low lending standards were followed by huge growth of construction in the world scale and house price appreciation accordingly. This situation created artificial confidence in the mind of borrowers that the credits, in the case of default, would be refunded by the house compensation. This situation was also supported by the market penetration of the world’s large business or financial institutions into small open economies.
Rapid increase in the availability of funds for the lending purposes has supported the decline in the lending standards, but a considerable affect was caused by the wrong easy money policy administered by the most of the developed and developing countries. But more weight is placed on the countries which have an impact on the dependent economies. As the consequences showed, the easy money policy through creation of excess of money in the global economy followed by the high volume of loans eventually caused the crash of the economy and financial crisis.
This policy was not justified and logically tight money policy could help in improving the situation, but there are still some disagreements this solution. This could be the case at some instances, but still have some limitations on the small open economies and in countries with advanced financial systems, as they probably have access to foreign credits from parent institutions. Accordingly, in this case it will have an effect of substitution of domestic and foreign exchange rate regimes.
According to Onado, three aspects of potential remedies could be considered against financial crisis: credit ratings, evaluations of asset marketability and transparency in the retail market of financial assets. Implementation of these policies would most probably be helpful and could cause some positive effects for the global economy. Recovery of the confidence in the financial system should be attained as soon as possible in order to move ahead. The market should be cleaned from “spoiled” securities and all the financial resources should be directed to recover the live ones. The government should purchase illiquid assets to help institutions to survive. And all the process should be transparent for the people to be able to monitor, judge and trust the survived institutions. This will help regaining confidence financial institutions.
January 10th, 2009 at 10:29 am
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January 13th, 2009 at 12:33 am
http://www.youtube.com/watch?v=Wj_JNwNbETA
The quality of this video is not perfect but the presentation is really good.
January 13th, 2009 at 3:22 pm
I admit. It is quite clear, that sub-prime mortgage market failure was the main reason for the ongoing financial crisis. I think it was not too difficult to predict such results. And this “easy money policy” was huge mistake.
January 15th, 2009 at 6:09 am
Thanks for the topic,,,yeah agree that nowadays the origins of financial crisis are clear to everyone,,,but let’s specify also easy money policy was implemented by governments (first in the developed and then in the developing countries),,, the reason for this might differ,,,but one is clear easy money policy raises government’s popularity amongst people,,,
e.g. in US government implemented above mentioned policy if I’m not mistacken in 90ths and now we can excercise the results…
what about the solutions: many was actually sad about it,,,but as the government created the crisis would it be able to recover from it?
I don’t believe that nationalisation of business, especially banks might be effective,,. as it was done in many countries (e.g. in UK the 80 % of bannks were nationalised!!!). In the future we might face some more problems,,, it might be high inflation in some countries,,,(especially in the case when FED has raised total reserve money, this can cause seriou problems in some years)
what’s left is hope, that they’ll be able to fix all those mess, they’d done.
January 15th, 2009 at 11:41 am
Actually, easy money policy as well as tight money policy has its advantageous usefulness. But the enforcement of this policy depends on many factors of the current economic position of the country. In economics, as the term monetary multiplier implies, when the supply of money increases with some special amount, depending on the saving rate, the income for the people increases several times more than the actual amount because of the multiplier affect. Accordingly, easy money policy administered by the countries did have a positive impact as it promoted the increase of wealth and income of the population at some instances, but these unjustified policies induced an uncontrollable indirect effect on the banking system, and we got a consequence: financial crisis.
The interesting direction of the discussion would be how we see our role and how can we find the enough force in our ability to participate and contribute to the process of combating the crisis.
April 15th, 2009 at 12:57 pm
Well i strongly agree with you on sub-prime mortgage but i also feel that some companies contributed to this through speculation activities which did not turn out in their favour, for instance companies which hedged anticipating a rise in oil prices and thi turned otherwise.
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