Report on the Current Financial Crisis Essay Example | Topics and Well Written Essays - 1000 words

Report on the Current Financial Crisis - Essay Example They explain that increasing liquidity and increasing nontraditional mortgages which were deceptive and beyond the ability of borrowers to pay was another trigger of financial crisis. Another trigger of financial crisis was the failure in securitization and credit rating which made poorly performing mortgages into bad financial assets. Security markets and stakeholders brought down credit quality in mortgages they securitized even as credit-rating organizations erroneously rated such securities as viable investments (Bancel and Usha 179). The buyers did not carry out due diligence thereby leading to losses. The financial crisis had various impacts on the global economy and the financial markets. The crisis led to reduction in the gross domestic product in most countries. The decline in GDP in some European countries in 2009 ranged between 5 and 8 percent and the decline was highest in countries that had their financial systems highly leveraged and the credit growth was high before th e onset of the crisis. The financial crisis also led to increased rates of inflation in countries especially in countries where the financial sector has not been adequately regulated (Bancel and Usha 183). The rates of unemployment globally went up following the financial crisis. Unemployment increased due to slowed production and sales in most economic sectors thereby constraining the job opportunities. The financial crisis also led to a decline in global trade with the less developed countries suffering from huge deficits of trade. The other effect of the financial crisis was negative impacts on the exchange rates of most currencies (DLA Nordic 1). Most import dependent countries experienced a sharp decline in the value of their currencies as compared to other countries thereby disadvantaging importers. Systematic risk refers to the possibility of the whole financial system collapsing in contrast to the collapse of a single group or component. Systematic risk has spread throughout the globe due to integration of the globe in trade, markets and finance. Technology has enhanced integration thereby making the world a global village (Tchana Tchana 1). The other factor that led to the spread of systematic risks throughout the globe is regulation. Systematic risks cause increased flow of investment in different countries. This is because as the investors seek to diverse their profits and mitigate the negative impacts, they choose to invest in countries that have low risk levels. Additionally, the systematic risks caused by financial crisis causes reduction in investments as the banks lack adequate resources to loan out for capital investment. Consequently, long term investments become slowed. The financial crisis had two effects on credit such as bonds (Bancel and Usha 183). The first effect was a reduction in the number of creditors given that only those creditors able to issue good quality bonds could get to the market thereby increasing their credit ratings. Ad ditionally, average systematic risks of creditors also increased dramatically (Bancel and Usha 183). The Federal Reserve has implemented several short and long term measures to prevent the domino effects (Reddy and Joellen 1). The main aim for Fed’s involvement was to enhance liquidity given that during the period the liquidity was low. Fed offered improved liquidity via open