Principles of Banking and Finance Essay Example | Topics and Well Written Essays - 2000 words

Principles of Banking and Finance - Essay ExampleThe attractive mortgage alter was based on a faulty premise that the house prices would continue rising, thus over-lending by the banks, in total disregard of the likelihood of repayment. When the false bubble in the mortgage lending finally burst, the monetary crisis began taking its toll, many loans were unrecovered by the banks and the banks become bankrupt. The third force behind the character reference crisis was global imbalances the developing Asian exporting countries had banging current account surpluses, a situation that has been defined as global savings glut. This situation led to an inevitable influx of capital into the US thus leading to the bubble in share prices in the late 1990s, and the bubble in house prices accordingly however, the US current account deficits unplowed going up from the 1990s due to offsetting inflows of capital to the US. In addition, another influential force that was behind the credit crisis w as deregulation policies, which had left the exchange rate to be influenced by foreign exchange markets (Evans17) deregulation of the financial sector in response to neo-liberal presidential term policies led to the expansion of the USs financial sector. In line with the expansions were the emergence of new and riskier financial instruments and accumulated credit this is what led to the stock market bubble and the housing bubble accordingly. Finally, the credit crisis nates be attri moreovered to excess capital in terms of huge sums of capital that had been stashed in the US and Europe at the time (Evans19) this led to stagnation in household incomes, thus constrained purchasing power of the population. This condition led to increased borrowing in households so as to sustain consumption and a built up of debt securities extensive borrowing to finance consumption spending in turn led to a rise in asset value, but when the rise could not be sustained any further, the growth of consu mption stopped suddenly and recession began. Q2 It has been proven beyond any reasonable mistrust that indeed, the US government treated some financial institutions differently during the credit crisis. For instance, when the Wall Street Investment bank Lehman Brothers crumpled in response to the crisis, there was a dramatic fall in the global economy this was a great blow to the financial sector and many people lost conviction in the banking system. However, exactly one month after the bank had collapsed and caused a global outcry, the US congress passed a bank bailout scheme that was labeled upset Asset Relief Program (TARP) (Fareed). The Troubled Asset Relief Program entailed taking billions of taxpayer money and using it to bail out financial institutions from the deep pits of the credit crisis ironically, the same financial institutions that were now being bailed out by TARP had caused the credit crisis in question. Questions have been raised with respect to the way the US government reacted at the onset of the credit crisis one of the most serious questions that arose is with regards to whether the Lehman Brothers could be saved or not. Thus exactly, why