In the light of these( moshirian& long-staff) and other relevant Essay

In the light of these( moshirian& long-staff) and other relevant articles, critically evaluate the reasons for the recent global - Essay Example The third one includes the multiple misunderstood innovations in financial engineering, which, in turn, include sub-prime mortgages, credit default swaps, new forms of securitization, and lack of responsibility in large private financial institutions, which operate globally. Many analysts conclude that the crisis was because of poor financial engineering innovations and failures in the financial sector regulations and supervision (Moshirian 2011, 502; Casu et al. 2006, 58). Fiscal policy in the United States led to low saving rate and monetary policy, which was persistently simple (Casu et al. 2006, 58). Other countries affected by monetary policy problems include several countries in Asia, the United Kingdom, Switzerland and some countries within the Euro zone, which had issues with the real interest rates. Many countries, like Korea, had policies that led to large amounts of foreign exchange reserves. The policies also led to global imbalances and distortion of international adjust ment process. These reserves put pressure on the macro-economic policies of many countries including the U.S. global imbalances phenomenon. This, however, was not a main cause of the recent economic and financial crisis. The imbalances and the crisis happened simultaneously as a result of faults in design and implementation of macro-economic policies in the world. This led to increase in global credit. It also led to housing booms in the U.S. and other places accompanied by a rise in equity prices and other factors that cause inflation. Financial sector regulation and supervision also caused the crisis, but the errors were not necessarily committed during that period (Moshirian 2011, 504). Bad financial conditions lead to too much lending and credit standards. Financial sector supervision could have reduced the excesses, but this was not the case anywhere in the world. Innovations in financial engineering have become partly blamed, but they existed even in the past (Moshirian 2011, 504). In most cases, the innovations were not clearly understood, thus leaving the risks involved unnoticed, which is important in financial risk management (Moshirian 2011, 34). Financial innovations did not cause the crisis, but they intensified through market dynamics and distorted the incentives for financial institutions (Moshirian 2011, 505). As such, large private financial that operated globally had an upper hand in this because they played a significant role in exacerbating the crises. The failure of these institutions was not due to lack of national supervisors, but because they absconded their responsibility. Furthermore, their global scope was not the cause of failure, but their large size and complexity. Cases were unique, but the institutions were extremely large. Managers of these institutions became deceived that unfavorable economic and financial crisis would persist indefinitely or until they complete their tasks. However, most of them were wrong (Guerrera and Thal -Larsen 2008, 65). A key element in the existing confusion was as a result of liquidity risks, which culminated into the disintegration of Bear Stearns and Northern Rock (Longstaff 2010, 45). These two made it clear that the risks involved with the reduction of liquidity had previously gone unnoticed since they had enough capital resources back then. The context of deregulation has greatly contributed towards development of these financial products for the last few decades. For example, the different