Causes of the Financial Crisis in the US

Causes of the Financial Crisis in the USINTERNATIONAL BUSINESSDuring the later on half of the 20th century U.S rescue was the well-nigh powerful parsimony in the humanity, they set the rules for rest of the world. They established multinational corporations all over the world which was indeed the heart of world economy. (Davis, 2009). When the U.S economy was climb, all the former(a) countries economy were also growing, at the state(prenominal) time when their economy went down it affected almost all the some other importing and exporting countries in the world because of the recent c devises which was named as world-wide FINANCIAL CRISIS. This was meant to be the biggest crises after THE GREAT DEPRESSION 1930 (Cambridge Journal of Economics, 2009). The crises rich person already recorded loss of over $150 billion and prominent number of banking institutions have state bankruptcy or being sold.(Kregel, 2008) championness among the banks filed for bankruptcy was Lehman Brothers, which was Fourth biggishst investment bank in U.S. (BBC, 2009). Therefore it is Coperni stop to identify causes of current monetary crises and resolution mea accrediteds. Secondly, UK government should ware efficient steps in assemble to reduce danger of further crises (Turner, 2009)During later part of the 19th century that is 1973 Daniel bell published a password titled THE COMING OF POST INDUSTRIAL nine. The book was closely forecasting to find the changes in economy and society in fall in state. One of the most visible changes according to him was the locomote force duty period from manufacturing and agriculture to service based indus see which he named as POST-INDUSTRIAL SOCIETY. The author was right in his prediction because today only 10% of the total labour force is employed in agriculture and manufacturing industry. mingled with the period December 2000 and May 2009 US lost more than 5.25 one million million million employees in manufacturing sector . There were many problems in durable goods industry, particularly in auto manufacturing industry. Two or more companies in that sector declared bankruptcy which stated that there was lot more bad intelligence service to come. Comparatively, manufacturing jobs were long cultivationing on an average of 8 years compared to an average of 3 years in service industry. The shift was driven by Wal-Mart. The firm employed about 1.4 million employees in 2009 which was more than that of 20 humongousst American manufacturing companies together.This caused changes to occur in pension off financing and plenty started investiture in mutual hold certificates. This happened through change in pension pecuniary that took over small tot to mutual fund from large amount of investment savings. This created pressure for high returns and also takes away the option of staying with a single firm. This enabled growth of institutional investors. Huge amount of portable pension funds were managed by banks, mutual funds and insurance firms. Nearly chiliad corporation shares were owned by institutional investors in 2005, with mutual fund taking maximum of 10% or more in hundreds of corporations. For manufacturers the of import focus was on share value which lot OME model (Original equipment manufacturer) which mode the production is out sourced to other external organizations. Other than manufacturers, functions much(prenominal) as HR and IT etc were also outsourced. This s mooly made drastic changes in tralatitious corporation where it became empty. They were concerned mainly about turning the out-sourced products into branded commodities. This shows that the stock commercialise existed only for intangible assets. (Davis, 2009)Now we shall discuss about the causes of the world(prenominal) monetary crisisOne of the main reasons for the crises was the housing let the cat out of the bag. A housing blab is an economies ruffle that occurs in local or international market . The recent financial crises started eventually in 2001 with the busting of U.S housing bubble and reached its peak in 2005.Basically it is said when there is a rapid increase in real demesne prises until it touches its peak and reaches unsustainable level. The bubble in the houses was identified in 2006 after the market correction. Former chairman of Federal Reserve Board, Alan Greenspan said in 2007 that they had bubble in housing but it was very late until they realized in 2005 and 2006 (Bianco, 2008)Many economists believe that the main reason behind housing bubble was caused by low interest rate set up by the Federal bank. The interest rates were reduced to 1% from 6.5%, this made great deal to mortgage their property against the contribute. The banks in return encouraged everyone to obtain loan against their mortgages because real estate prices were at its peak. business.cch.com When inflation began in 2004, US national withdrew monetary accommodation, they started increa sing the interest rate and mortgages payment also started rising apparently. Tight money policy came into play and there was a slap-up demand of money and therefore house prices fell. Banks and other financial institutions financed at very low rate, and when interest rates started raising there were corpulent chance of default by the subprime borrowers thus default by such borrowers led to losses. Though the loans were secured and were sold to special institutional vehicles (SIVs) the losses were quiesce bourn by banks and other institutions (Mohan, 2009)Deregulation of financial system gave rise to tradable pricks through securitization. Securitization means turning an asset or credit wag debt into tradable instrument. This system made household to become twain investors and issuers of securities. Thus employment in different form of capital emerged which was unstable and did not last for long which caused the financial crises (Davis, 2009). Apparently US government failed to manage their cunning deficit. The housing bubble was mainly caused by cheap credit and low interest rate rates. The main reason for cheap credit was there was a lot Chinese capital in U.S. And that is because US imports most of the products from china and sells it at a cheap rate to its consumers (Weismann, 2008)Global large Economy Imbalance According to Portes (2009) global macro economy was one of the major underlying reasons of the financial crises. This is because of saving investments and huge cross hedge capital flow made a lot of pressure on financial intermediation process, these unbalances with flaw in the financial market and instrument together became one of the specific features of crises (Mohan, 2009).In view of the current crisis, the UK presidential term can initiate the following actions to prevent another crisisLooking at the long term , we think of what should be done in order to avoid danger of future crises, it is clear that macro economy imbalance was one of the major underlying reason, so it is better UK government try to find the problems which lie at the interface amongst macro economy policy and financial system regulation.Few more things that government should moot are they should make sure that they protect the needs of ordinary people when the information is costly to acquire. Next measure is the government should make sure that internalises significant externalities. This is in contrast to the currency regulatory frame work which does not focus on externalities and it also provides incentives for the institutions to become very large to fail or too interconnected to fail, because the larger the institution the more interconnected and higher the risk of escaping during crises.( Brunnermeier, 2009)The government should also focus on systematic risk contribution because during the financial crises losses tend to spread over other financial institutions also. The government should try to form a regulation that reduces the risk of spreading over the losses to financial institutions. A financial contribution to systematic risk can be large because of its correlation with financial difficulties among the other institutes or causes financial difficulties at other institutes. Therefore new measures should be taken to reduce the risk of both the channels. (Brunnermeier, 2009)According to Turner (2009), liquidity management and new regulations help to minify liquidity risk. The future rules and regulations should be monitored effectively (Turner, 2009).Asset price booms can be regulated by implementing strict fiscal and monetary policies. These policies should take into consideration price stabilization and macro-financial stability. There has to be effective co-ordination between domestic and international policies. The UK Government should try to stabilize all the financial institutions that hold illiquid assets. The regulators have to combine macro-prudential and macro economic analysis by using sectoral an alysis (Turner 2009).REFERENCESBrunnermeier, M.K., (2009) Financial Crisis Mechanisms, Prevention and Management Online Princeton University. lendable at http//66.102.9.132/search?q=cache2lGCaBp37xYJfmg.lse.ac.uk/upload_file/1197_BrunnermeierPaper.pdf+http//fmg.lse.ac.uk/upload_file/1197_BrunnermeierPaper.pdfcd=1hl=enct=clnkgl=uk accessed 28 February 2010BBC., (2009) Timeline Credit Crunch to Downturn Online functional at http//news.bbc.co.uk/1/hi/7521250.stm accessed 28 February 2010Bianco, K.M., (2008) The Subprime Lending Crisis Causes and Effects of the owe Meltdown Online CCH Mortgage Compliance Guide and Bank Digest. Available at http//docs.google.com/ watcher?a=vq=cacheVf9c_0SfRl4Jbusiness.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdf+http//business.cch.com/bankingfinance/focus/news/Subprime_WP_rev.pdfhl=engl=ukpid=blsrcid=ADGEESj5j4t_00aCZcSuhO6_qF6EZO99uP_P34gAGd2f_A7I_C2MVjlkbSVcFqc6FpAPGyYECW5sPQG6k_k4ja-tXrsL2EsZd8alQZk0U9n7Esqh31V1F9pwowYc1IeTo-U3I5vHAR9Ksig= AHIEtbT1hFiNcXHdS3Y4lgV7AYIRF1xY4g accessed 28 February 2010Crotty, J., (2008) Structural Causes of the Global Financial Crisis A Critical Assessmentof the raw(a) Financial Architecture Online PERI Political Economy Research Institute, University of Massachusetts Amherst. Available at http//cje.oxfordjournals.org/cgi/content/abstract/33/4/563 accessed 28 February 2010Davis, G.F., (2009) The stick up and Fall of Finance and the End of the Society of Organizations Online Available at http//docs.google.com/viewer?a=vq=cacheZorkG-ZL1xoJwebuser.bus.umich.edu/gfdavis/davis_09_AMP.pdf+http//webuser.bus.umich.edu/gfdavis/davis_09_AMP.pdfhl=engl=ukpid=blsrcid=ADGEESjziDXUPSnMjim8GZyAz8aK9YRHi-xpS8SYDDv3l4gtQ9hV0ahiOz8oXWhb9zGr-HAAkRmaRdH34zQJuaoZpLyEv_QopXWxlCvjM7CuFPsiWbmUdqY-b-hZ1KQL4The1skEpDsig=AHIEtbSoJoJuRiAosw1OGQqy3G2BrQEutg accessed 28 February 2010Mohan, R., (2009) Global Financial Crisis- Causes, Impact, Policy responses and LessonsOnline one-year India Business Forum Conferen ce, London Business School. Available at http//www.bis.org/ look into/r090506d.pdf accessed 28 February 2010Turner, A., (2009) The Financial Crisis and the Future of Financial Regulation Online The Economists Inaugural city Lecture, Financial Services Authority. Available at http//www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0121_at.shtml accessed 28 February 2010Weissman, R., (2008) Deregulation and Financial Crisis Online The Huffington Post. Available at http//www.huffingtonpost.com/robert-weissman/deregulation-and-the-fina_b_82639.html accessed 28 February 2010