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Create a 12 page essay paper that discusses Financial markets do not work well when left to market forces alone, (La Porta, Lopez-de Silanes and Shleif, 2005), Journal of Finance. Critically, explore
Create a 12 page essay paper that discusses Financial markets do not work well when left to market forces alone, (La Porta, Lopez-de Silanes and Shleif, 2005), Journal of Finance. Critically, explore the possible causes of the current crisis in the financial markets. You should provide evidence.
However, if such a financial meltdown is to be curtailed in the future and if such a phenomenon is to be prevented from happening again, the onus is on the emerging generation of financial planners and economists to understand the intricacies of the crisis and the contributing factors that have been brewing the mould of crisis over the past few years.
As such, it is deemed essential to unearth the root causes of the current financial crisis.
There is an enormous storm that has been raised over the past few months that have seen the giants of Wall Street crumble only to see bigwigs such as Lehman Brothers and Merrill Lynch to enter the books of history from the glories of the present. However, before we proceed to study how this was even allowed to happen, it is essential to understand how the world economy has ended up in this mess.
This research paper will look into four major factors which caused the current financial crisis and as such this essay will attempt to analyze and explore how the correlation between the different factors culminated into an environment which encouraged financial institutions to overstep their logical responsibilities.
There are different reasons for the current crisis as there is multitude of factors behind the apparently complex phenomenon being witnessed by the financial markets of developed world. First, financial institutions made lending decisions which may not be termed as prudent because due to different factors such as low interest rates, less stringent monetary regulations as well as general increase in economic well being of households, forced financial institutions to lend to subprime borrowers. Subprime borrowers include those borrowers with relatively poor credit ratings as well as impaired repayment capacity. Due to higher return offered by such borrowers as financial institutions made a tradeoff between high