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Credit crunch and foreclosures

From the perspective of the firm, power was being exercised by the people who were taking risks and not the ones assessing it. For growth purposes, traders were seen as having the ability of producing direct profits and in effect, they could not be substituted nor replaced. Increased innovation in various finance products, excessive risks taken by lenders, low levels of interest rates, and people’s greed to invest in unstable investments all contributed to the crisis.

Moreover, financial institutions should be advised to enlarge the amount of risk they can handle by including off-balance sheet assets into the balance sheet (Sims, 2009, p. 15). This will reduce the amount of aggregate risk at the disposal of the financial system because losses will compel those who absorb risks to either close out or sell off. Innovations made many financial institutions to exploit loopholes found in the regulatory system.

Firms were given the authority to reduce the amount of capital they were holding by spreading assets to legal entities owned by other people. The purpose of capital is to safeguard or act as an insurance against loss of value of the assets. This gives the institution enough resources to meet the demands of its

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depositors. However, since capital is very expensive to hold, managers look for means of reducing the amount in their possession. Such trends contributed to the crisis when firms found themselves in possession of insufficient capital.

The notion that sophistication contributes to quality and that statistical models which are highly complicated are beneficial is false, and this can only be true if laws of physics were similar to those of finance (Lackner, 2009, p. 222). Robert Shiller, a best selling economist says that uncontrolled overextension of credit contributed to write-offs, credit crunch and foreclosures. To restore confidence in the financial market, bailouts should only be limited to the short run factors and low income people suffering from subprime deals.

The long term solutions for subprime deals should involve an ambitious package to revamp the financial system, limit risks and occurrence of bubbles, and new regulations to protect people from inflationary trends.

Bibliography

Lackner, C 2009, “Emotional Causes for the Present Global Financial Crisis. ” The Journal of Psychohistory, Vol. 37, pp. 212-229 Ruzich, M. , and Grant, A 2009, “Predatory Lending and the Devouring of the American Dream. ” The Journal of American Culture , Vol. 32. 2, pp. 60-75 Simos, E 2009, “Ending of Global Recession in 2010. ” The Journal of Business Forecasting, Vol. 28. 1, pp. 1-19.

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