A Crisis so Severe, the World Financial System Is Affected

A Crisis So Severe, The World Financial System Is Affected Following a period of economic boom, a financial bubble—global in scope—has now burst. A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail. John Bird, John Fortune, Subprime Crisis, February 14, 2008 While there are many technical explanations of how the sub-prime mortgage crisis came about, the mainstream British comedians, John Bird and John†¦show more content†¦Many banks were taking on huge risks increasing their exposure to problems. Perhaps it was ironic, as Evan Davies observed, that a financial instrument to reduce risk and help lend more—securities—would backfire so much. When people did eventually start to see problems, confidence fell quickly. Lending slowed, in some cases ceased for a while and even now, there is a crisis of confidence. Some investment banks were sitting on the riskiest loans that other investors did not want. Assets were plummeting in value so lenders wanted to take their money back. But some investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically. The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out. New capital was injected into banks to, in effect, allow them to lose more money without going bust. That still wasn’t enough and confidence was not restored. (Some think it may take years for confidence to return.) Shrinking banks suck money out of the economy as they try to build their capital and are nervous about loaning. Meanwhile businesses and individuals that rely on credit find it harder to get. A spiral of problems result. As Evan Davies described it, banks had somehow taken what seemed to be a magic bullet of securitization and fired it on themselves. Creating More Risk By Trying To Manage Risk Securitization wasShow MoreRelatedEssay about Global Banking Crisis735 Words   |  3 Pagesfrom the prior global banking crisis? What should be done to prevent such a crisis from happening again? After so much worldwide financial turmoil, learning the right lessons from the global banking crisis is a challenge for the advanced economies and the larger emerging economies whose policies will determine the global financial system over the next several years. 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