Causes Consequences and the Government Responses of the Current World Financial Crisis

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It is no longer a secret that the people responsible for making sure that the financial system is stable in the United States helped because of the 2007-10 crises. The Financial Guardians in the US and Europe established policies that encouraged adverse credit allocation and a lot of risk-taking by their financial institutions. They still stood by the same policies even after learning of the impending financial problems. Financial Guardians in the United States have at many times chose and maintained policies that have always led to the crisis. This counter reacted to the crisis by adding other rules and establishing newer regulatory boards with more powers granted by Congress. Anderson and Timmons (2007), give an example evident where the regulators never reacted to the extraordinary increase in the financial institutions’ advantage. This could not react to the movement of assets worth trillions of dollars from the bank’s balance sheet. This shows how the regulators did not do their work. Increasing the regulator’s power without checking the problem and trying to regulate it helps in solving nothing. The aim of this essay to examine the causes, consequences, and the government responses of the current world financial crisis faced in the United Kingdom and China. When the crisis broke out, it gets believed that the United Kingdom economy would not fall to the financial turbulence.This was because of the thriving real economy that was strong on export growth and substantial financial position of businesses and households. However, according to Anderson and Timmons (2007), this changed in late 2008, following the rescue of Fannie Mae and Freddy Mac, the subsequent bankruptcy of the Lehman brothers and the growing fear of the Insurance powerhouse, American International Group (AIG) dragging down leading financial institutions in United Kingdom and the United States of America in its wake. Market valuations of financial institutions disappeared. panic emerged in stock markets as investors ran for the sovereign bonds. The financial crisis was now a reality. Banks became forced to restrain credit allocation. Asset markets fell rapidly in the UK. With the trade credit getting expensive, firms saw their sales fall and stockpile up. The huge exposure of the United Kingdom to America’s subprime problem was soon evident in 2007 when BNP Paribas froze the resurrection of three investment funds, claiming inability to correctly value the structured products. Because of this, the risks between financial institutions grew drastically as shown by the high-interest rates charged by the bank amongst themselves for short term loans. Still, at this point, the observers were still not alert that the systematic changes will create a problem. According to Adrian Shin (2008), in 2008 with the fall of America’s Bear Steams and Northern Rock Bank and Landes Bank in UK things took a turn.