Thomas Jefferson and credit crisis Essay
Most financial institutions in the world provide financial facilities such as cash, loans and mortgages to the customers, but if the money borrowed are not repaid within the stipulated period of time it results to financial losses - Thomas Jefferson and credit crisis Essay introduction. Credit crisis refers to a situation whereby there is a sudden reduction in the availability of credit or there is an increase in the cost of obtaining loan from the banks.
The ways in which credit crisis happen
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Credit crisis occurs when there is an anticipated decline in the value of securities used by the financial institutions while obtaining loans. Other factors that lead to a credit crisis are when the central bank increases the rates of interest or the reserve requirements or when the Central government instructs banks not to engage in lending activities (Turner, G. 2008).
It was reported that the credit crisis in America was attributed to various factors: the inability of people to repay their mortgage repayments, poor lending practices by the lenders, overspeculation and excess building during the boom session, very high debt levels compounded with poor Government and central bank policies. The high risk mortgage sector allowed too many loans to individuals who had weak credit histories and who had poor incomes. People were encouraged to buy homes and advised that that they could refinance them later. It was assumed that eventually the prices of homes would go up and hence people would be able to repay the loans, but in the long run the prices of houses began to fall and credit conditions were tightened.
The Federal Reserve monetary policy lowered the interest rates to below the market prices which led to many people investing in housing and other investments. The discount rates and the interest rates charged to banks from the Fed were also lowered. This aggressive but inflationary action led to troubled banks that getting direct funding from the Fed and paid only a slightly higher interest rate for a longer period of time. This discount window lending actually failed and the Fed came up with other programs such as Term Auction Facility, Primary Dealer Credit facility (PDCF), and the Terms securities Lending Facility (TSLF).The overall effect was that there was direct funding in the market that lead to pumping of billions of dollars into the financial system in a bid to salvage the collapsing of the financial institutions as a result of the people that had defaulted in meeting their financial obligations( Turner, G. 2008).
The reasons why credit crisis affects so much of the international financial markets
The credit crisis has had a significant effect on the international financial markets because banks have been forced to spend over $400 billion in losses and write offs hence they have been left with very little money for them to spend and therefore the availability of credit to consumers has actually declined. The overall effect on the international markets has been marked by the decline in the global economy as has been witnessed by high inflation rates, reduced energy subsidies and tighter monetary and financial policies.
It is important for management of financial institutions to ensure that the finances are properly kept and maintained so as to overcome future loses as this can affect the performance and reputation of a company.
Turner, G. (2008).The Credit Crunch: Housing Bubbles, Globalization and the
Worldwide Economic Crisis (: London, Pluto Press), ISBN 9780745328102