What are the Causes and consequences of financial crises?
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• Jargon crunching:
Financial institutions in the US started adopting aggressive marketing strategies to expand their businesses. ‘Innovation’ and ‘new products’ became the buzz words. Instead of collecting their outstanding loans over the stipulated periods, such outstanding debt was “securitized” and sold away.
• Sub-Prime Lending (SPL) :
In simple English it means giving loan to a non-credit worthy clients. This infamous word spurred competition among the financial institutions and took unsafe and unprincipled lending to a maximum extent. This over enthusiasm has given a birth to present financial crisis and made global economies vulnerable. The United States' sub prime crisis has turned out to be a real nightmare and has the potential to drag the world's largest economy into a recession. “The rising defaults on sub prime mortgages in the US triggered a global crisis for the money markets”. Many of the world’s leading investment banks have collapsed due to sub prime lending.
• Priority to Service sector:
Agricultural sector has been neglected and service sector got much prominence. This has led to more dependence on banking and other financial intuitions. Abrupt downfall in this sector has created a shock and pushed global economies into recession.
• Weak regulations:
Experts said that weak regulations are added fuel to the present global finical carnage. They blamed the present state of regulation for the current mess, stating that free markets do not need government interference. Without regulation, the markets would have functioned by themselves and bad agencies would have automatically collapsed and good ones only will exist. When the government provides guarantees and protection to the bad element, it gives a chance to the good to turn into bad- that is called moral hazards
