Events Before the Financial Meltdown of 2008

Introduction

The Financial meltdown of 2008 was a period in which the financial market and the banking system faced an extreme monetary crisis. It was catalyzed by the United States housing market for the financial crisis that later spread down to the rest of the world through some of the linkages in the global financial markets. Most banks across the globe faced significant losses, which confronted them with relying on government support to avoid being declared bankrupt. The economic meltdown had many negative results for the citizens since many lost their job opportunities, thus forcing them to experienced financial constraints. This was a result of the economy experiencing the most significant recessions. Some of the leading causes of the meltdown of 2008 include a lot of risk-taking within a macroeconomic environment, a tremendous amount of borrowing by different banks and inventors, and failure by the government to put forward adequate regulations and policy implementations (Zheng et al., 2021). Market inefficiency, high insecurities within the market system, and inadequate market competitive skills also played major roles in catalyzing the financial crisis.

There were events that raised the alarm about the financial crisis. The first event was the loss that occurred in the United States due to pirates taking positions to rob one of the most extensive pharmaceutical health departments, which led to the nation losing a significant amount of money. This event brought a lot of negative results to the economy of the United States and the whole globe at large, which depended mainly on the importation of drugs from the United States (Thalassinos & Thalassinos, 2019). Study shows that significant employees were also laid off after the loss. These workers who were laid off faced difficulties in terms of financial constraints. They could not be able to meet their daily demands.

The second event was the fire outbreak that occurred in New Mexico. New Mexico is a country that is known to be the best in producing electronic devices such as Nokia phones branding (Gouda & Saranga, 2018). The economy of Mexico failed after the fire outbreak disaster that forced the company to stop manufacturing the Nokia phones. They were also forced to lay off some of the workers, thus reducing the economic taxing rate. This event affected the country since they could export these products and earn an incredible income. The abrupt stoppage of this company led the country to face a financial crisis.

Statement of Problem

1. Humans live in an interrelated and interdependent universe undergoing an extreme economic downturn, more significant than ever before. Such a financial meltdown is caused by a variety of factors, together with inequitable policy and legislation, exploitable vulnerabilities in the governmental, economic and banking industry, and a shortage of moral value systems in a globalized world monopolized by the selfishness of the substantial desiring immediate benefits and huge profits while ignoring the needs of the disempowered (Spash, 2021). The occurrences of 2008 had also overstretched the world economy and strained government finances, even as billions of individuals who lost their jobs, pension benefits and residences in the after effects insist on social welfare.
2. Europe has served as the epicenter of the latest economic difficulties, and the Eurozone country’s urgent task in the financial banking meltdown. Furthermore, Italy and Spain, the Eurozone country’s third and fourth most significant economies in the world, portray some other massive problems, with shareholders attempting to push borrowing costs on their securities to unprecedented levels (Höing & Kunstein, 2019). The anxiety is that economic instability in the Euro group will spark some other worldwide fear and confusion comparable to and potentially worse than the one in 2008, with adverse repercussions for economically poor, vulnerable countries and individuals.
3. Europe’s debt crisis was precipitated by the global financial crisis of 2008. Still, responsibility also falls on; careless lending institutions that provided manageable debts and fueled property bubbles, regulatory agencies that ceased to restrict and government figures who’ve been blind to the obstacles of creating an apparent European exchange rate between many major economic sectors (Stiglitz & Rashid, 2020). In Southern Europe, severe austerity measures geared at sustaining marketplaces and appeasing global creditors had also developed an innovative “underclass” of economically inactive, homeless and hungry people.
4. Revolutionizing the worldwide financial and economic structures in the context of a global governmental entity is an essential basis. We must search for a feasible model for long-term sustainable advancement and affiliated banking institutions.

Root Cause Effects

The first root cause is the high levels of risk-taking in a favorable macroeconomic environment; the economic climate in the United States and other nations was good. Productivity recovery was robust and stable, and price level, underemployment, and borrowing costs were all low. Prices for homes increased dramatically in this atmosphere (Fakhrunnas et al., 2018). The expectations of the investors that the housing prices would increase led increased households. In the United States, to be more specific, borrowing was accompanied by building a house. The exact expectations also encouraged other countries to borrow more of the finance that rose above the purchase price. All the borrowing was done by investors seeking to gain a short-term benefit. The banks also had the will to give large numbers of loans to the investors since they could think the economic environment would remain as good as it was then.

The second root cause was the increased level of borrowing by banks and investors. Financial institutions, as well as other investment firms in the U.S. and elsewhere, loaned more money to boost their borrowing and buy mortgage – backed security (MBS) goods. Borrowing money to purchase a resource magnifies future gains and possible liabilities. Consequently, while house prices started to fall, investors and lenders suffered substantial losses due to the significant amount of funds loaned (Park & Kim, 2020). Furthermore, financial institutions and some investors took out loans for very brief periods, which would include unattended, to acquire investments that couldn’t be sold immediately.

The last root cause was poor policy implementation procedures; Subprime mortgage borrowing and MBS items were not adequately regulated. Specifically, the organizations that developed and sold the complicated and impenetrable MBS to venture capitalists needed to be adequately controlled (Afxentiou et al., 2022). Besides numerous personal debtors were given a lending that was sufficiently huge that they appeared improbable to be repaid, the scam was becoming more prevalent, such as exaggerating a lender’s earnings and over-promising shareholders on the security of the MBS product lines people were marketed.

Proposed Solutions

• Treasury purchase of mortgages, loan pools, and servicing rights.

This latest plan also assumes that assisting troubled property owners will bring positive developments property market and Wall St and that it may be done fast and at a magnitude. According to the numerous draft picks of the legislation also being propagated in House and Senate, the Reserve bank would be given the power to acquire “any other financial product” considered necessary, in addition to equities connected to both residential and commercial mortgage loans (Kim et al., 2022). In comparison, our proposal calls for Bank to restrict its buying home loans, loan reservoirs, and authority.

• Proper regulations and policy formulations.

This proposal helps the country develop solutions to determine the loopholes that may lead to financial losses. The government can review the policy that regulates economic issues, such as loan borrowing policies, to help the investor who wishes to borrow loans by taking their correct details so that in any case they fail to pay back their loans, they can be traced so easily (Caglio et al., 2021). This proper financial regulation wills the countries to minimize the losses that are caused due to poor policies.

Data Requirements

Secondary data was mainly used since all of the results were already published. Both the websites and books were used to extract information on the financial meltdown in 2008. The secondary data was valuable because they provided well-detailed data concerning the causes of the economic collapse, where the grounds were categorized according to their economic impacts. The documents also provided the solutions to the reasons discussed above.

Anticipated Results

The results from the finding showed that most of the causes of the financial and economic meltdown of 2008 could have been avoided if suitable precautions had been taken. Poor management policies are made by the national government and implemented by the country’s citizens; all these two subjects could help solve the country’s financial problems. Financial institutions ought to have avoided the rate at which they could give loans to investors by first checking on the records of the individuals who would wish to take loans.

Conclusion

In summary, the financial meltdown of 2008 was caused by several factors, such as high levels of risk management in financial accounting, which included the loan borrowing rate and poor policy formulations by the national government and financial institutions. Poor borrowing skills and inadequate securities over the country’s property lead to high losses of economical materials. Some precautions to the problems included the economic revisions of the implementation of monetary policies.

Reference

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Caglio, C. R., Darst, R. M., & Kalemli-Özcan, Ṣ. (2021). Risk-taking and monetary policy transmission: Evidence from loans to smes and large firms. NBER. Web.

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Thalassinos, E. I., & Thalassinos, Y. (2019). Financial crises and e-commerce: How are they related. SSRN. Web.