Financial Crisis and Their Possible Solutions Essay

Financial Crisis and Their Possible Solutions - Essay ExampleIt is manifestly clear from the discussion that fiscal crisis affected most parts of the world. It began in the US after the Difficulties in the US submarine market that had rapidly rocketed and spilled all over the world. Bordo et al queue up that the frequency of the financial crisis is higher than the previous one and can be comparable only to the Great Depression. It had detrimental imp personations on different sectors of the economy in all countries. Reinhart, Reinhart and Rogoff have, in the past days documented the effects of the banking crisis that argon typically proceeding by credit booms and asset price bubbles. They note that on average 35% real drop in housing prices stretch over a to almost six years. integrity prices fall over 55% over a period of 3 years, while output in those countries fall by 9% in two years, unemployment increases by 7% in four years while an 86% debt increase based on the pre-crisi s level. Many models have documented the effects of the financial crisis. Adrian and Shin, Brunnermeier have documented a thorough review of the events preceding the financial crisis in late 2007 and aboriginal 2008. They note that the seeds of financial crisis can be traced back to the low interest rates policies adopted by the Federal Reserve and other world central banks after the collapse of the technology stock bubbles. The expect for the debt securities by Asian banking institutions aided in fuelling the economic crisis. Acting as financial intermediaries, banks channel money to potential investors. Through the process of borrowing and lending, they benefit from a diversified portfolio of risk sharing. They also act as monitors (Diamond, 1984) and streamline loans to well-organized customers (Gorton and Kahn, 1994) and other vital roles in maturity transformations. This implies that in crisis, every banking institution becomes concerned. For instance, dingle Aricia and Raj an (2008) provide that banks grief contributes to a decline in credit and low GDP .Further evidence provides that those sectors, which heavy depend on external financing, perform relatively dismal during the banking crises. These effects atomic number 18 stronger and severe in developing countries. In addition, the report note that over the last two decades, banking sector continues to be multiplex in its modes of operations. For instance, banks use various instruments to hedge risks. However, despite the complexity banks have remained sensitive to the panics and runs. Gorton (2008) note that holders of short-run liabilities feared to fund banks as they the anticipated losses in the sector could have in their securities. The recent look for proposes two theories to give a tentative explanation on the causes of the bank panics and runs. One argues that panics are undesirable events caused by random withdrawals unrelated to the changes in the real economy. Bryant (1980) and Diam ond and Dybig (1983) note that agents have uncertain needfully that relates to consumption. If other depositors believe and can even further establish the slightest of evidence, then all the agents will find it rational and imperative to redeem their claims from banking institutions and will cause the panics and banks runs. Another theory explains that banking crises are natural outset of the business cycle. An economic slump will reduce the value of the bank resources, heightening the possibility that banks are unable to meet