Analysis of your Active Monetary Disaster plus the Banking Industry

Analysis of your Active Monetary Disaster plus the Banking Industry

The present-day economic disaster started as element with the international liquidity crunch that transpired somewhere between 2007 and 2008. It’s believed that the disaster had been precipitated with the comprehensive worry created via monetary asset providing coupled using a enormous deleveraging while in the economic institutions within the primary economies (Merrouche & Nier’, 2010). The collapse and exit of your Lehman brothers a multi-national bank in September 2008 coupled with significant losses reported by principal banking institutions in Europe also, the United States has been associated with the worldwide fiscal disaster. This paper will seeks to analyze how the global money crisis came to be and its relation with the banking market.

Causes for the monetary Crisis

The occurrence on the intercontinental personal crisis is said to have experienced multiple causes with the key contributors being the fiscal establishments in addition to the central regulating authorities. The booming credit markets and increased appetite of risk coupled with lower interest rates that had been experienced with the years prior to the economic disaster increased the attractiveness of obtaining higher leverage amongst investors. The low interest rates attracted most investors and monetary institutions from Europe into the American mortgage market where excessive and irrational risk taking took hold.

The risky mortgages were passed on to personal engineers with the big personal institutions who in-turn pooled them together to back less risky securities in form of collateralized debt obligations (Warwick & Stoeckel, 2009). The assumption was the property rates in America would rise in future. However, the nationwide slump inside American property market in late 2006 meant that most of these collateralized debt obligations were worthless in terms of sourcing short-term funding and as such most banks were in danger of going bankrupt. The net effect was that most of your banking establishments experienced to reduce their lending into the property markets. The decline in lending caused a decline of prices inside property market and as such most borrowers who had speculated on future rise in prices experienced to sell off their assets to repay the loans an aspect that resulted into a bubble burst. The banking establishments panicked when this transpired which necessitated further reduction in their lending thus causing a downward spiral that resulted to the global economic recession. The complacency from the central banks in terms of regulating the level of risk taking on the economic markets contributed significantly to the disaster. Research by Merrouche and Nier (2010) suggest which the low policy rates experienced globally prior to the crisis stimulated the build-up of monetary imbalances which led to an economic recession. In addition to this, the failure with the central banks to caution against the declining interest rates by lowering the maximum loan to value ratios for the mortgages banking institution’s offered contributed to the financial disaster.


The far reaching effects which the economical disaster caused to the global economy especially within the banking community after the Lehman brothers bank filed for bankruptcy means that a comprehensive overhaul with the international monetary markets in terms of its mortgage and securities orientation need to be instituted to avert any future economic crisis. In addition to this, the central bank regulators should enforce strict regulations and policies that control lending in the banking trade which would cushion against economic recessions caused by rising interest rates.

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