The aftermath of the global financial crisis 2007-2009 Essay

The aftermath of the global financial crisis 2007-2009 - Essay Example Consequently, liquidity became common; this facilitated the concept of innovative finance (D’Arista and Griffith-Jones, 2008), putting more funds into risky investments. Sub-prime loans were easily available before the emergence of financial crisis. Udell (2009) explains that the sub-prime loans were easily available in America. Basically, this type of loan is given to those people who do not have positive credit worthiness. And, banks and other financial institutions do not provide loans and other short-term credit facilities to those people or institutions who have negative credit worthiness or who are unable to repay loan. In the United States of America, before the beginning of financial crisis, many were unable to receive loans due to these factors and they resort to sub-prime loans. Initially, there were a few people and small institutions were giving sub-prime loans. With the passage of time, from local to multi-national banks and other financial institutions started gi ving sub-prime loans. Since higher interest rates were charged on the sub-prime loans, many banks and financial institutions saw it as an opportunity to earn more profit. The attacks of 9/11 were economically dangerous as well. The magnitude of attacks was sufficiently negatively on the economy of America. The entire American economy was damaged; the Fed came under pressure to economically manage the situation and devise such economic short-term policies to minimise the impacts of 9/11 on the American economy. With this aim in mind, Greenspan of Fed decided to reduce the interest rate to the level of 1 percent. The reduction of interest rates further allowed ordinary Americans to avail the benefit of interest rate reduction. This reduction further directly increased the risk of default and bankruptcy. Savings of developing countries further aggravated the availability of excessive liquidity. In the late 1990s and early 2000s, many developing countries poured their funds into the dif ferent American banks and other financial institutions. As a result, banks and financial institutions faced the problem of excessive liquidity. Normally banks face shortage of liquidity, and to fulfil their daily requirements, banks try different means to obtain funds. But, before the financial crisis, most of the banks and financial institutions were filled with the excessive liquidity. Now, banks were required to invest the excessive liquidity for the purpose of earning returns. The inflow of excessive liquidity was so huge that many banks totally compromised on the risks associated with different types of investments. Banks and other financial institutions were desperate to utilise the availability of excessive liquidity at the cost of safe and secure returns. Banks and other financial institutions did not give an appropriate consideration before going to invest; even they overlooked the possibility of default, which could shake their commercial existence. Banks and other financi al institutions started lending to those individuals and institutions that were lacking to fulfil the requirements of creditworthiness. Consequently, these factors contributed to the inception of global financial crisis, which did not remain within the boundary of the United States of America, but spread to other countries. Many shortcomings did exist in the risk management policies of banks. Too little understanding of exposure to