January 10th, 2018
Effects of the Financial Crisis and Economic Recession|conclusion
The recent financial crisis has had numerous real economic effects mediated by the failure of some of the biggest financial institutions. Such effects on the U.S economy and the government response to the crisis were what formed the purpose of this paper. Both the government policies existing prior to the crisis and imprudent practices by the bailed entities were identified as the main reasons that lead to the widespread effects of the crisis.
Effects of the crises were noted primarily on increasing the cost of external financing. By such an increase; firms that relied on this mode of financing faced a bleak future with credit acquisitions being hard to come by. Such effects had the potential to affect other sectors of the economy by their effect on employment thus the income and consumption level of individuals.
To prevent loss of confidence in the financial system, the government’s immediate response was to structure a bailout plan for some institutions. Secondly the deposit insurance was raised to cater for potential future economic adversity. Though such contribute to the solution they have also been argued to promote moral hazards within the organizations and reluctance to deal with failing entities by regulators ; thus necessitating external regulation of the sector.
Campello, M, Graham, JR & Harvey, CR 2010, ‘The real effects of financial constraints: Evidence from a financial crisis’, Journal of Financial Economics, [article in Press]. DOI: 10.1016/j.jfineco.2010.02.009
Drawbaugh, K 2010, ‘Regulators admit failures in the U.S. financial crisis’, The Washington Post,(14 January)viewed 3 May 2010 < http://www.washingtonpost.com/wp-dyn/content/article/2010/01/14/AR2010011400426.html>
Goodhart, CAE 2008, ‘The regulatory response to the financial crisis’, Journal of Financial Stability, vol. 4, no. , pp. 351-358. DOI: 10.1016/j.jfs.2008.09.005.
Hanc, G n.d, ‘Deposit insurance reform: State of the debate,’ FDIC Banking Review, 1-26. viewed 3 May 2010 <http://www.fdic.gov/bank/analytical/banking/1999dec/1_v12n3.pdf>
House of Commons 2008, The run on the rock, viewed 3 May 2010<http://www.parliament.the-stationery-office.co.uk/pa/cm200708/cmselect/cmtreasy/56/56i.pdf>
Kenc, T & Dibooglu, S 2010, ‘The 2007-2009 financial crisis, global imbalances and capital flows: Implications for reform’, Economic systems, vol. 34, no. 1, pp. 3-21. DOI: 10.1016/j.ecosys.2009.11.003
Kirkpatrick, G 2009, ‘The corporate governance lessons from the financial crisis’, Financial Market Trends, [pre-publication version vol. 2009/1], OECD, viewed 3 May 2010, http://www.oecd.org/dataoecd/32/1/42229620.pdf
Larson, MD 2007, How federal regulators, lenders and Wall Street created America’s housing crisis: Nine proposals for a long-term recovery, viewed 3 May 2010 <http://www.moneyandmarkets.com/files/documents/Housing_White_Paper.pdf>
Rötheli, TF 2010, ‘Causes of the financial crisis: Risk misperception, policy mistakes, and banks’ bounded rationality’, The Journal of Socio-Economics, vol. 39, no. 2, pp. 119-126. DOI: 10.1016/j.socec.2010.02.016
Weiss, MD & Larson, MD 2008, Proposed $700 billion bailout is too little, too late to end the debt crisis; Too much, too soon for the U.S. bond Market. Paper Presented to United States Congress Senate Banking Committee and House Financial Services Committee, viewed 3 May 2010 < http://www.weissgroupinc.com/bailout/Bailout-White-Paper-Sept-24-2008%282%29.pdf>