Critically evaluate the reasons for the recent global financial crisis Essay

Critically evaluate the reasons for the recent global financial crisis - Essay Example This view has recently been confirmed by an IMF report (2011), that financial crises usually follow "credit or asset price bubbles" (IMF, p. 6). Moshirian (2010) has found that the inability of national regulatory bodies to respond adequately to a global market that has become increasingly interdependent has left these bodies unable to control regulatory arbitrage and the international movement of toxic assets (p. 504). In a way of confirming these last two perspectives Longstaff (2008) has found that lower movements in the ABX Index of credit-default swaps did cause financial contagion in other financial markets. This report will show how in the US, deregulation did serve to encourage market liquidity that could have advantaged banks and homeowners. The report will explain how the lack of appropriate regulation in the financial markets led to both a real estate bubble and the global financial crisis that reached the UK and world markets. ... gulation policy expressed through passage of US federal acts that eventually, though not intentionally, allowed banks to collateralize the assets and to use them, as investment banks, to participate directly in the secondary financial markets. Deregulation was originally intended to finance supply with more liquidity of resources in order to meet an increasing demand in the real estate market. Eventually supply overtook demand while banks and financiers overtook market safeguards in favor of speculative profit. The US housing bubble that occurred in 1983 with the savings-and-loan debacle was amplified to multiple effects in 2008, producing the financial crisis that spread to the UK and the world. The 2011 US Congressional Financial Crisis Inquiry Commission Report identified "widespread failures in financial regulation and supervision" producing instability that undermined world markets (p. xviii). Deregulation McClendon (2010) explains how in 1980 the Depository Institutions Deregul ation and Monetary Control act freed banks from usury ceilings held by US states, enabling them to charge conventional high interest rates to appropriate populations for home mortgage loans. This act also raised the deposit insurance limits up to $100,000. The ceiling had previously been $40,000. The Alternative Mortgage Transaction Parity Act of 1982 soon followed and allowed banks to make adjustable rate and interest-only mortgages outside of state restrictions. Both of these measures were intended to help banks and savings and loans institutions spread more liquidity into appropriate markets. The US Garn-St. Germain Depository Institutions Act of 1982 enabled savings and loans banks to enter the lending market with low loan-to-value ratios (McClendon, 2010). The result was that the