It is necessary to start by defining the term financial crisis. Therefore, financial crisis is a situation where the legal tender people are using changes in value (Stiglitz 2). Many financial crises are because of banks panicking, and many recessions coincide with these panics. In general, financial crisis is as a situation where the money in circulation is overtaken by the demand rate of money by people. This means that liquidity is quickly evaporated because banks do not have money in supply and as a result the banks are forced to sell other investments in search of money to cover the shortfall or collapse (Stiglitz 3). Therefore, an in-depth analysis of financials crisis is done.
Various types of financial crises exist. The first type is the banking crisis. This occurs when a bank suffers a sudden rush of withdrawals by depositors (Laeven and Fabian 3). This is because many banks lend out the money they are receiving making it difficult for them to pay back quickly all deposits if they are suddenly demanded, so a run may leave the bank in bankruptcy. Secondly, there is the speculative bubble financial crisis. In this case, it crashes where by economists say that a bubble exist when a financial asset present value is greater than the future value. In addition, a financial bubble also exists where many investors buy an asset in the aim of selling them at a higher price. In this case, it might result the assets into crashing due to the expectation investors have that they are buying only if others will buy at a higher price (Laeven and Fabian 4). Finally, there is the international financial crisis that occurs when a certain country decides to devalue their legal tender because a speculative attack exists in the market.
Since 2007, the US has been in the grasp of financial crises that are considered the worst economic event since the Great Depression (Stiglitz 12). According to financial giants, the most amazing about this crisis is how quickly it started, and the speedy rate it spread across the globe. The scholars believe that the crisis was because of a housing bubble that started in December 2007 (Stiglitz 13). The US was experiencing an economic growth caused by increases in personal debts that was because of high prices increase in real estates. As the cost of housing was rising, house owners were going to banks to take personal debts placing their houses as collateral for the debts. This introduced a process of re-mortgaging the house that became a nationwide phenomenon for the US (Stiglitz 24). For this reason, people will continue to take personal debts and placing their houses as collateral as long as they are going to increase in value.
This continued in America until America reached a dangerous threshold where people could not be able to pay their debts and at the same time, it became expensive for people to purchase this house. Additionally, house prices were increasing at an increasing rate due to speculation. In this case, many investors who were reselling the houses made a lot of money due to speculation. To make matters all this activities were being financed by the personal debts people were taking. According to scholars, what made this crisis spread quickly was because of the personal debts being financed by short-term borrowing (Stiglitz 33). In this case, banks were placing a substantial amount of mortgages into packages for purposes of selling to investors. The process banks were using was referred to as securitization. This means that securities were being created by the banks for purchasers to guarantee the payment of the different loans. As a result, this process was creating funds for the banks for further lending.
In August 2007, panic was striking the world’s financial markets. In this case, both individuals and large banks were no longer able to finance their debts (Stiglitz 34). The housing market began flooding with people trying to cash in on their homes before prices started to crash. As more homes came in the market, it started causing the prices to reduce since they were in large supply as compared to the demand. As a result, it led to the continuing of the cycle.
The effects of financial crises are extremely severe. The US housing market has lost five trillion dollars in value (Stiglitz 37). In America, millions of people are losing their houses, others are finding difficulties in paying their debts while other are paying mortgages that are higher than the present value of their houses. This resulted to the other avenues like savings and pensions to loose trillions of money. The financial crisis is destroying several of the largest investment banks and insurance companies. For these facts, many motor industries are making looses heading for closure due to bankruptcy. Tax revenues that are being collected by the city, county, state and federal governments are also decreasing. These governments are continuously recording losses in all the revenue collections they are doing in their society.
According to the above analysis, financial crises could be controlled by rules and regulations. In this case, measure of enforcing these laws and regulations should be created by extending authority to non-governmental authorities and local markets. Secondly, the government reserves should be watched closely to monitor any changes that are taking place. Similarly, debts should also be monitored to make sure that they do not exceed create a crisis. Finally, risks taken by the different authorities should be keenly watched to ensure that they do not endanger the financial position of a country.