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Challenges and Opportunities Arising from Financial Crisis

1. Discuss the major challenges and opportunities arising from the global financial crisis.
2. Discuss the major factors behind the collapse of the U.S. mortgage markets. What role, if any, did financial innovation play in the collapse of the mortgage market that began in the summer of 2007? Also, evaluate the Federal Reserve's action taken before and in the response to the crisis.
3. What are some of the major challenges in regulating banks and other financial firms in countries around the world? Also, should there be a global or transnational financial regulator?
4. "Will countries with well-functioning and stable financial markets enjoy higher rates of economic growth?" Discuss whether you agree with this statement and explain why.

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1. Discuss the major challenges and opportunities arising from the global financial crisis.
The global financial crisis presented both opportunities and challenges to businesses. These are:
Challenges
? Weaknesses in the global financial system surfaced, some financial products and instruments became so complicated that when things started to unravel, the trust in the whole system started to fail.
? Low-skilled factory workers, who did not own any stock, were hit the hardest by the financial crisis. This segment of population became worse off with economic life pulled out underneath them.

? Governments world over had a difficult time in protecting citizen's social and economic well-being in the face of crisis.

? Greater interconnectedness of the global economy resulted as a result of the crisis. This poses greater challenge than before.
Opportunities
? The crisis provided policy makers an opportunity to take lessons from past crisis to build policies for handling future crisis.

? The financial crisis had to do more with over investment in property which subsequently impacted the capital market. Such observations suggest that more importance should be given to integrating behavioral economics with existing economic models.

? One of the most important regulations that emerged from the great depression is the Glass-Steagall Act. Banks, even though know that they were too big, and engaged in excessive speculation. The crisis tells that banks are too important for a financial system to fail, but the financial regulation removed the very legislation designed to stop them from failing. This provided policy makers a crucial lesson to regard financial regulations not as a burden, but to regard them as investment for preventing government bailout obligations.

? Increased government spending to combat crisis presented them with an opportunity to invest in long-term growth strategy rather than waiting and overspending when bad time strikes.

? The pace with which the crisis moved from the U.S. to Asia and Europe provided opportunity to build closer links between world's major economic powers.

? A major opportunity has been to learn that it is during bursts that old and ineffective systems are replaced with new and more effective systems, shifting labor and capital to where they are valued the most.
2. Discuss the major factors behind the collapse of the U.S. mortgage markets. What role, if any, did financial innovation play in the collapse of the mortgage market that began in the summer of 2007? Also, evaluate the Federal Reserve's action taken before and in the response to the crisis.
The financial crisis was triggered by a liquidity shortfall in the United States banking system. It has resulted in the collapse of large financial institutions, the "bail out" of banks by national governments and downturns in stock markets around the world.
Multiple factors were involved, many of which began as long ago as 2001, and three main factors were:
Sub-prime mortgage: The mayhem started as a primarily mortgage crisis, originating from huge exposures of over leveraged financial entities to the real estate sector. Real estate was considered the safest investment. Between 1997 and 2006, the price of the typical American house increased by 124%. Incomes remaining the same, more and more people were able to afford houses due to an easing of lending requirements. High risk loans, including subprime mortgages given to people with troubled ...

Solution Summary

The solution discusses the major challenges and opportunities arising from the global financial crisis and the collapse of the U.S. mortgage market.

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