Strategic Banking Issues Regulations and Profitability Essay

Strategic Banking Issues Regulations and Profitability - Essay Example There is a host of ideas about the probable cause of the financial crisis. The classical explanation is very clear. Financial crisis are the result of monetary excesses. Monetary excesses first create boom and then there is a bust. In the crisis of 2008, we had a housing boom and bust, and these in turn led to financial turmoil in the United States and rest of the world.The monetary policy was strategically loose. The interest rate setting based on macroeconomic variables had shifted significantly from the rates prescribed by the policy makers. The Federal Reserve said that the interest rates would be low for a considerable period and then would rise at a measured pace. These actions were irregular government interventions to reduce the fear of deflation that Japan had faced in the 1990s.There are a few competing explanations for the crisis. One of the arguments is called ‘Global Savings Glut.’ Proponents of this concept argue that the low interest rates in 2002-2004 wer e caused by global factors and thus monetary authorities have nothing to do. This alternative explanation focuses on global saving. It argues that there was an excess of world saving or a ‘global saving glut’ as they say and it pushed interest rates down in the United States and other countries. But the numbers from the International Monetary Fund says a different story. The numbers tells that the global savings rate as a percentage of world’s GDP in 2002-04 was very low compared to the 1970s and 1980s.... The Federal Reserve said that the interest rates would be low for a considerable period and then would rise at a measured pace. These actions were irregular government interventions to reduce the fear of deflation that Japan had faced in the 1990s (Taylor, 2009, pp. 3-4). There are a few competing explanations for the crisis. One of the arguments is called ‘Global Savings Glut.’ Proponents of this concept argue that the low interest rates in 2002-2004 were caused by global factors and thus monetary authorities have nothing to do. This alternative explanation focuses on global saving. It argues that there was an excess of world saving or a ‘global saving glut’ as they say and it pushed interest rates down in the United States and other countries. But the numbers from the International Monetary Fund says a different story. The numbers tells that the global savings rate as a percentage of world’s GDP in 2002-04 was very low compared to the 1970s and 1980 s (Taylor, 2009, pp. 5-6). The crisis started as the fall of subprime lending market. Here the monetary interaction with the subprime mortgage problem needs to be understood. In the summer of 2007, the United States first experienced a striking contraction in wealth. The risk spread increased, and the credit market deteriorated. The 2007 United States sub-prime crisis has its roots in falling housing prices and this led to higher default levels particularly among less credit-worthy borrowers. The impact of these defaults on the financial sector has been largely exaggerated due to the complex bundling of obligations that was thought to spread risk efficiently. Unfortunately, the ensuing tools were extremely