Critical Analysis: Causes of Financial Crisis and Recurrence Factors

This essay critically examines the causes of financial crises, focusing on the ability of banks to create money and the subsequent rise in unpayable debts. It highlights how excessive lending and speculation in housing and financial markets contribute to economic instability. The essay discusses the consequences of banks restricting lending post-crisis, leading to price declines and economic downturns. It also addresses the concept of debt-deflation spirals and the potential for future financial crises, referencing perspectives from financial experts. The essay concludes by emphasizing the need for government intervention and structural reforms to mitigate the impact of future crises. Desklib offers students access to similar essays and study resources.

Running head: ESSAY 1
Finance
STUDENT DETAILS:
1/21/2019

ESSAY 2
The financial crises have been a regrettable part of the industry from the beginning. The reason
of happening of financial crisis was that it was possible for banks to make too much cash, very
rapidly, and made use this to push the price of houses and consider over the financial market
(Benetrix, Lane and Shambaugh, 2015). In the following parts, possible causes of financial
crisis and possibility of repeating financial crisis are discussed and critically examined.
The main cause of financial crisis is ability of banks to make money. Whenever loan is made by
the bank, more money is also made. In encouraging the financial crisis, banks made enormous
sum of new money through creating the loans. In only seven years, the amount of money and
debts in economy got double by the banks. Further, this money was used to drive price of houses
and for the speculation in the financial market. Only few trillion pounds that banks made
between year 2000 and 2007 went to business out of the financial segment. Approximately thirty
one per cent went to the housing properties that pushed house prices earlier than remunerations.
An additional twenty per cent went in commercial real estate such as workplace building and
other properties related to business. Moreover, approximately thirty-two per cent went to a
financial segment, along with the similar financial market, which finally imploded at the time of
financial crisis. However, only eight per cent of whole money, which was made by the banks in
the time, went to business out of the financial segment. Additionally eight per cent went in the
personal loan and credit card (Chen, et. al, 2016).
Other reason is that debts become unpayable. Providing huge sum of money in the market of
properties push up the price of houses along with an own debt level. The payment of interest has
required to be made on all the loans, which banks create, and with arrears rising faster than
income; ultimately, certain persons become not able to keep up with reimbursements or the
settlements. At this point, they discontinue making payment of the loans, and banks get

ESSAY 3
themselves in risk of the bankruptcy. It is stated by former chairman of United Kingdom’
financial service authority that the financial crisis of year 2007 to 2008 happened due to the
reason that people were not succeed to restrain the
financial system’s formation of personal credit or own money. This procedure was reason or
cause of the financial crisis. Immediately after financial crisis, banks restricted the new loans to
business and families. The brake in lending made cause of price in the market to fall, and it
means individuals that have taken on loan so much to consider on the increasing prices had to
put up for sale the asset in order to pay back the loan. House price has been decreased. As the
result, banks panicked and cut lending even further. The downward twist therefore starts and the
financial tips in the downturn (Floyd and Skinner, 2015).
After happening of financial crises, it was refused by the banks to lend. In this way, the economy
of country got shrinked. The bank lends while it has surety that bank would be paid again.
Therefore, while the nation economy is conducting adversely, banks desire to restrict the
providing money. However, the banks decrease the new loan amount they create; the public still
have to keep up repayment on the debt they before now contain. The main issue is that while
money is used to make payment of the loan, that money is demolished and vanishes from the
financial system. It is described by Bank of England; “Just to take loans makes money, the
repayment of the loan demolishes money (Mera and Renaud, 2016). The Bank creating loan and
customers paying the loan are the very significant manners where the bank deposits are made
and shattered in new financial system.”
Therefore, while individuals pay loan earlier than the bank is creating new loan, this is just like
draining the oil from an engine of the automobile: the financial system slows down and the price
reduces (Lane and Milesi-Ferretti, 2018). According to the result, a financial system risks

ESSAY 4
slipping in the debt-deflation spiral, wherever earnings and price drop but debt of persons do not
alter in the value, leading to the debt becoming comparatively more exclusive and costly in the
actual term. Even those business and persons that were not included in making the bubble
endure, reasoning the recession (Lins, Servaes and Tamayo, 2017).
Moreover, it is also said by Tim Geithner, Former Treasury Secretary that the global financial
crisis would happen once more at the similar points, however the structural reform took on after
year 2008 may serve to ease the damages. Tim Geithner said in his interview with CNBC that the
financial system of United State of America at this time is a steadier, flexible, and strong
financial system than before financial crisis of 2008 (Gilchrist, et. al, 2017). Still with the
disputes and problems in the financial system of America, America is the blessed country nation.
Beside this, in upcoming period, if the financial crisis does occur, though, the Federal
Reserve and the governments will require to react again. The only manner to secure the
individuals from the effect of classic terrors is to have federal bank and the governments step in
and take the risk the market may not accept. The subsequent global financial crisis, though,
would search the federal bank with approximately no actual devices to cover framework issues
with liquidity, and no fiscal space in the globe where most economies are operating fiscal deficit
for 10th successive year and international debt is at all-time highs( Carbo‐Valverde, S.,
Rodriguez‐Fernandez and Udell, 2016).

ESSAY 5
References
Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C. (2015) International currency exposures,
valuation effects and the global financial crisis. Journal of International Economics, 96, pp. S98-
S109.
Carbó‐Valverde, S., Rodríguez‐Fernández, F. and Udell, G.F.(2016) Trade credit, the financial
crisis, and SME access to finance. Journal of Money, Credit and Banking, 48(1), pp. 113-143.
Chen, Q., Filardo, A., He, D. and Zhu, F. (2016) Financial crisis, US unconventional monetary
policy and international spillovers. Journal of International Money and Finance, 67, pp. 62-81.
Floyd, E., Li, N. and Skinner, D.J. (2015) Payout policy through the financial crisis: The growth
of repurchases and the resilience of dividends. Journal of Financial Economics, 118(2), pp. 299-
316.
Gilchrist, S., Schoenle, R., Sim, J. and Zakrajšek, E. (2017) Inflation dynamics during the
financial crisis. American Economic Review, 107(3), pp. 785-823.
Lane, P.R. and Milesi-Ferretti, G.M. (2018) The external wealth of nations revisited:
international financial integration in the aftermath of the global financial crisis. IMF Economic
Review, 66(1), pp. 189-222.

ESSAY 6
Lins, K.V., Servaes, H. and Tamayo, A. (2017) Social capital, trust, and firm performance: The
value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4),
pp. 1785-1824.
Mera, K. and Renaud, B. (2016) Asia's financial crisis and the role of real estate. New York:
Routledge.