Financial Crisis of 2008: Analysis of Avoidance by Western Nations

This essay examines the 2008 global financial crisis, also known as the worst crisis in history, and investigates whether Western nations could have avoided it. It details the crisis's origins, including the collapse of the US sub-prime market, the failures of financial institutions, and the impact on global economies and livelihoods. The essay analyzes various factors contributing to the crisis, such as the interplay of policies promoting homeownership and easy access to loans, the role of cheap credit, and the excessive risk-taking by financial institutions. It also explores potential preventative measures, including stricter regulations, improved risk management, and more cautious economic policies. The essay references several sources to support its arguments, concluding that while the crisis was complex, it may have been avoidable through proactive and responsible actions by governments and financial institutions.

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TABLE OF CONTENT
Could western nations have avoided financial crisis in 2008? ...................................................3
REFERENCES................................................................................................................................6
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Could western nations have avoided financial crisis in 2008?
Financial crisis of 2008 are also known as Global financial crisis and it is considered as
the worst crisis ever. From the middle of 20007 and 2008 financial crisis started to show their
effects worldwide (Reddy and et.al., 2014). During the period many financial institutions
collapsed, many were bought by other companies, there was a huge downfall in the stock market
and even the governments that were healthy and good enough came out with financial crisis's
problem. The seeds of the crisis were sown at unusual times.
With such issues livelihoods of people were getting affected. The institutions and
companies were throwing employees out of their organization which was directly affecting the
survival of common ma int the world where countries are interconnected. Collapse of the US
sub-prime market had laid the great impact on the world. Many financial organization became
complex which lead to ultimate failure of the whole system (Soll, 2014). The last months of
2008 witnessed the worst financial crisis. The first indication started to appear in January 2008.
On 15 January, drop in the profits of Citigroup banking led to fall in profits of New York Stock
Exchange. At the end of year 2007 many American and European companies faced losses. In the
later months of the year an investment bank which was 158 years old witnessed bankruptcy. In
order to stop further downfall and stop collapse further most dramatic involvement in financial
market was made by US government.
The decline and degradation in real economy is being matched up to the collapse of
markets of finance. Stock markets were dropping worldwide even if the government was trying
to prevent the bailout of financial institutions and banks. Market suffered unemployment. US
housing bubble burst caused damage to financial organizations globally (Nelson and et.al.,
2014). The financial crisis were prompted due to interplay of many policies that were promoting
ownership of home, easier access to loans etc. The crisis had a significant role in declination of
the country's as well as individual's wealth. This was actually the storm that was brewing over
the years but now has reached to its break down point. It absorbed many financial organizations,
institutions and banks and investment companies.
The basic cause behind the crises constitutes the factors that its ability to create new lines
for credit that resulted into dry up of money flow and slowed down economic growth as well as
purchase and sell of assets. Therefore, institutions that were holding assets with them had
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dropped down its value and were not getting the amount of value needed to make payment of
loans (Sassen, 2015). As a result, their reserved cash dried up and made restriction on the credit
and abilities to make new loans. There were many other factors as well that were responsible for
the crises included the availability of cheap credit which make it easier for people to buy and
purchase houses and make investments purely based on conjecture.
As a result, the amount of money increased in the system and people wanted to make
expenditure of that money. The same thing was demanded by the people which increased the
product demand and resulted into inflation (Stubbs and et.al., 2017). Many private firms and
companies were holding billions of dollars but in reality they had no value, that was just on
papers and were shuffling only. The main question arises as how the situation got so worst? The
answer to this is the ultimate greed of the nation. American economy is merely built on the
credit. It is when used wisely become a great tool.
We can make use of credit to expand or start any new business. For purchase purpose
also it can be used. As a result, more job opportunities are created and satisfying people's need.
But situation got out of control when it went unchecked (Cull and et.al., 2013). The housing
market declined as it forms a chain reaction by swapping and flipping homes to make quick
profits in our economy. Bear Stearns and Lehman Brothers suffered failure that caused downfall
in inter bank lending, cut down of availability of credit and recession getting deepened. ABS
market collapse caused questioning of solvency as it is combined with accounting of market to
market.
The Gramm-Rudman Act was the ultimate villain. Many of its profitable derivatives were
engaged by the banks. The mortgage backed securities needed them as guarantee (Magalhães,
2014). According to Federal Reserve only housing will get hurt due to mortgage crises.
Why it happened ?
There were many causes that have been concluded. According to the US Senate's Levin –
Coburn Report complexity of financial products and high risk associated to it, conflicting
interests, regulators failure, agencies that were rating credits and market itself caused the
downfall in economy leading financial crisis. Many investors and the agencies rating credits
failed to analyze risk involved accurately. Interest rates had played a great role in financial crisis
according to the research (Tsygankov, 2015). Around 31% of the money created went into
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property of resident which resulted into increase in prices of house faster than the increase in the
wage. Further 20% of the money went into commercial real estates including office buildings
and business property. Around 32% of the money went into financial sector which eventually
were the markets that came up with financial crises. Only 8% of the total money created by
banks at that time went into those businesses other than financial sector and further 8% of the
total money went to the personal loans and credit cards.
As a result of it, banks started to refuse lending money and economy started shrinking.
According to the Federal commission, the financial crisis could have been avoided which caused
massive havoc worldwide on the economy. Due to action of humans financial crisis arose. The
crisis were also due to the failure of risk management by government of financial institutions.
The financial crisis were avoidable as it was a result of risk taken by the banks in excessive
number (Streeck, 2014). The administration could have acted slow to such an overheated
economy. Lending rates could have been increased by the Federal Reserve. Before applying to
all the financial operations regulators could have been more strict by knowing their potentials in
which they are involved. Not even a single agency did this. The reason behind not doing could
be electoral considerations would have not mattered. Neither of the government wants to put
restrictions on the economy.
Decline in wealth is directly related to the decline in consumption as well as business
utilization. It is also related to the government spending directly. It has globally affected the
world. Due to continue downfall of finance it prompted economic collapse globally. Many
developing countries that faced significant growth in recent years faced a sudden downfall in the
country's wealth. As its effects, many people came under poverty line as people were losing their
employment and jobs. Decreasing number of jobs caused movement and shifting of workers as
well. Financial crisis of 2008 taught the lesson that once the confidence of the market shatters it
cannot be restored quickly. In a world where everybody is interconnected, liquidity crisis turns
into solvency crisis. But after facing so much of things, markets come out strongly to have new
beginnings.
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REFERENCES
Books and Journal
Cull and et.al., 2013. Bank ownership and lending patterns during the 2008–2009 financial crisis:
evidence from Latin America and Eastern Europe. Journal of Banking & Finance. 37(12).
pp.4861-4878.
Magalhães, P. C., 2014. Introduction–financial crisis, austerity, and electoral politics. Journal of
Elections, Public Opinion & Parties. 24(2). pp.125-133.
Nelson and et.al., 2014. Uncertainty, risk, and the financial crisis of 2008. International
Organization. 68(02). pp.361-392.
Reddy and et.al., 2014. The 2007–2008 global financial crisis, and cross-border mergers and
acquisitions: A 26-nation exploratory study. Global Journal of Emerging Market
Economies. 6(3). pp.257-281.
Sassen, S., 2015. Losing control?: Sovereignty in the age of globalization. Columbia University
Press.
Soll, J., 2014. The reckoning: Financial accountability and the rise and fall of nations. Basic
Books.
Streeck, W. 2014. Buying time: The delayed crisis of democratic capitalism. Verso Books.
Stubbs and et.al., 2017. The impact of IMF conditionality on government health expenditure: A
cross-national analysis of 16 West African nations. Social Science & Medicine. 174
pp.220-227.
Tsygankov, A., 2015. Vladimir Putin's last stand: the sources of Russia's Ukraine policy. Post-
Soviet Affairs. 31(4). pp.279-303.
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