Meanness and inconsistency within the Banking sector largely contributed to financial crisis and the current global recession. It is unfortunate to note that we are in an era where greed and irresponsible behaviors have become the basis for economic growth and expansion. The global financial crisis has affected both people right from the top rich billionaires to the regular individuals. This form of writing discusses how greediness and irresponsibility within the Banking sector has hugely led to world-wide financial crisis and the current
Time bomb in the financial crisis and probably what was experienced was just a detonator but not the main problem. Several countries and financial institutions leadership failed to recognize that the issue was really great thus leading to application of a band aid on a major wound. At the onset of the credit crunch, the responsible institutions and the media assumed that everything was fine making someone to wonder why they did not see anything coming (Basu, 2011).
Many people lost their houses because by early 2010, one out of every eleven mortgages was in default. It was actually a big shock to see central banks allowing prolific lending to individuals so that they could buy houses. Lending although was a good idea; the individual borrowers could not afford or service the loans. It may either be blamed on the then president who allowed the borrowing to take place. How could a lower credit rated clients be given loans? As much as bill Clinton thought it wise to lend to the underprivileged families to as a matter of achieving the American dream, it was not logical financially. He may just be part of the problem due to his political interest (Mittnik et al, 2009).
The political actions and the financial institutions are believed to have greatly contributed to the economic crises more so in the USA. It should be understood that US is the biggest economy in the world and has created the dollar as a planetary currency thus giving it opportunity to stir most economies globally. Most petroleum producing countries deposited their huge sum of money in the USA banks and the financial instruments and the surplus money prompted them to lend to the needy people. This was absolute greediness and irresponsible behavior and action that a financial institution could have taken (Singh, & Bruning, 2011).
Excess funds led to cheap lending and borrowing encouraged individuals especially the middle and low income earners rushed for the mortgages in order to own home (Semmler & Young, 2010). This stretched the income earned by these classes of people thus leading to payment default. The banks took advantage of the fact that most people wanted to own land and housing and that America rarely create saving. Actually, the American financial institutions acquire more savings from foreign countries to finance the American consumption and population has poor saving habits.
Financial institutions and banks have their own crises because they cannot absolutely regulate themselves. The institutions were driven by urge to create more money from the surplus that they had. It is important for banks and other financial institutions to follow the set rules of borrowing and lending without overlooking any of the rules. It is indeed careless and acquisitiveness that guided the institutions towards the global financial crisis and the economic meltdown. This was a totally preventable condition.
The current economic and financial crisis was largely contributed by the contemptible, unsecured and unrated housing loans given by banks to their clients. The irresponsible and greediness of the banks is exceptionally evident when they refused to take responsibility of their unsecured house loan by packaging them into a collateralized debt obligations and selling them to other agencies. What surprises even more is when the agencies do exactly what was done by the banks by passing the loans to other agencies thus spreading them as assets globally without thinking of possible outcomes. There must have been a huge and dangerous assumption made by the banks and the agencies (Mishkin, 2011).
The interest rates significantly came down accompanied with an immense increase in house loan. Easy acquisition of house loans prompted many people to get the mortgages and build their own homes thus appreciably leading to increase in land prices. The building and construction activities were everywhere thus creating more jobs and wonderful income in the real estate business. The low mortgage interest saw several banks greedily competing for clients thus motivating people to borrow even more than they could actually be allowed to under normal legal circumstances.
Interestingly some families borrowed to service the old loans and remain with the surplus for vacation or acquisition of more assets and investments such as investing in a second house. The core of the economic crisis began when the loans went to the rates below the prime rates of banks because of irresponsible assumption by the banks that land prices would raise even more. It is worth noting that the banks never bothered to analyze the financial credentials of the borrowers specially their ability to repay the loans (Bondt, 2010).
Furthermore, the banks did not provide the borrowers with sufficient information about the loans particularly when they gradually raised the interest rates. Inadequate information and the rise of interest rates made some borrowers incapable of servicing the mortgage thus leading to serious defaults and inability of sustaining the real estate business in 2007 (Selim, 2005). The series of default cases led to bursting of a bubble that the mortgage hedge fund as well as some institutions was in real troubles. The problems spread to the other agencies that loans had been transferred to by banks and on some investment banks thus causing huge financial institutions such as Citigroup, UBS, and Merrill Lynch to announce write down (Jovovic, 2012).
It is evident that the low interest rates were exacerbated the housing issue through the reduction of the federal funds rate which translated into lower mortgage rates causing the banks to borrow at lower rates hence charging lower interest on mortgages. The banks thought that with the skyrocketing of land prices, they could probably seize the houses in case of any default and sale them handsomely.
Failure of analyzing the ability of borrowers to repay their loan must have been misguided by the fact that the land would appreciate in value. The banks considered most the number of people they were giving loans instead of analyzing the characters and ability of their clients to repay loans. They simply wanted more money without even thinking of possibilities of bad debt by focusing on profit opportunity. Apart from publications by many economists on the possibility of unsustainable nature, no action was taken to curb the low interest rates (Goczek, 2011).
However, the US government intervention has also wreaked havoc on the financial systems particularly the regulation of the financial industry largely contributed to financial crisis. The financial crisis perhaps could not have been wide ranging as it was if the government could have come up with effective, efficient and proactive rules governing the financial institutions (Yeoh, 2010). The devastating effect of the financial crisis still haunts many governments globally especially the dealing with national debts. The policymakers have mired the world into recession without even learning lessons from severe prior recessions (Tomasic, 2011).
Capitalism and inherent greed can be blamed to have caused the financial crisis by sickening the housing market and allowing pool of dangerous investments (Vukovic, 2011). The Federal Reserve could have taken control of the rising situation of the interest rates especially after listening to economic views. Provision of cheap home mortgages was solely done by the government interventions with an intention of making home mortgages more available to the needy. The broad intervention in the home mortgage sector was backed by both democrats and republicans unanimously without focusing on the future effects (Hillinger, 2010).
The American administration brain-teased banks with vicious enticements and unmerited intercession to offer mortgage to less creditworthy individuals and this greatly plunged the banks into undeniable risk of bankruptcy. If the government could have not compelled the mortgage markets then, perhaps they could have not involved themselves in this unnecessary, risky and reckless behavior (Wagner, 2010).
It is therefore obvious that the permissible coercive support of credit policies by the government in home mortgages have led to moral hazard and greatly contributed to the financial crisis. The government sponsorship of debased lending standards in home loans was combined with massive political financial incentives to encourage the bad loans led to a skyrocketing default rates on subprime mortgages (Nichols, Hendrickson & Griffith, 2011).
Nonetheless, the banks and other financial institutions could have refused the government proposals by avoiding the shadow banking system. Issuing of poor quality loan is inconsistent with the banking regulations. The rise of global financial crisis and economic recession could perhaps been avoided by the strict adherence to the regulations and rules set aside. It is evident that greediness and irresponsibility within the Banking sector hugely led to global financial crisis and the current.
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