Financial Crisis Harvard Case Solution & Analysis

Financial Crisis Case Solution

The global crisis 2007-2008 has shaken the whole world and previous consensus, of the popular policy makers and financial institutions that leaning against the wind will not offer any solution to the regulatory and Micro-Prudential institution.As it offers impractical and undesirable results for the institutions.(Wallis on, 2015).Since the last crisis, the regulatory field initiatives to strengthen against the “leaning against the wind” orientation has progressed a lot while the monetary policy is still at a relativistic. However, it is important to draw the rationale on the elements and factors that have been the source of the shocks including monetary policy and financial institution. But first, it is important to understand the independent sources of shock against the policies.

There is already an extensive literature emphasizing the role of the financial sector as an amplifier of the other sources of the shock. Credit policies, monetary policies and technological frictions leading to collateral constraints. While blaming the banking and financial institution for the rise of the financial crisis, But according to Wilson, these financials occurred due to eased statelessness or mortgage policy that have amplified the bubble and increase the risk on return year by years.

In doing so, the government eased the policy of acquiring the housing loans which lead to attracting the below income level to acquire the loans at single payment period. Policyholders to increasing risk of the collapse or default that ultimately resulted in bubble burst and directly gave rise to financials.

Sine there are different actors that played apart infringing the financial crisis , the main ways identified by Wilson are the government loose monetary policies and housing loans that took the whole US into the grip It raised the attraction to acquire the ownership of the house, in which the interest rate was reduced to attract, however year by year when the investment became risky and the region started facing the outcomes of the policy due to increased defaulted rate, the interest rate got higher to control the situation, however, instead of doing better, the high interest rate flaked the borrower thus burst the bubble.

THE financial crisis in the US was fueled by the subprime mortgage bonds that are considered one of risky bonds. Since, the subprime mortgage bonds gives high return, because the banks had issued mortgage to the consumers those either has low credit ratings or consumers has high chances of being defaulted on the repayment of the mortgage. Thus, these mortgages were sold to the financial institutions through the process of secularization in form bonds to the pool of investors.

Furthermore, it was real estate bubble that has been filled at its end. Therefore, as the neoclassical economic theory describes that economic drivers are demand and supply in the market, where as the consumer is being controlled by the price and the demand in the market. Generally, the demand and supply do influence the prices in the market. Again coming back to the topic, the secularization process is more profitable for banks to cut the leased assets, and make another investments. However, if the consumer, failed to pay the mortgage payment, then whole chain from banks, financial intermediary, and special vehicle purpose, and finally the pool of investors would be affected negatively. Since, the bank or special vehicle purpose could not pay to investors on their own behalf, because banks collect the payments from the mortgage consumers, pays to the investment bank, special vehicle purpose pays to the investors.

Similarly, the when investors failed to make payments to the banks, and banks could not pay to the investment banks. Consequently, uncertainty among the investors were seen. Furthermore, the demand in the real estate markets decreased that caused the prices to come down. Meanwhile, the whole points were deeply connected with each other that caused uncertainty among the investors, and consumers.

Financial Crisis Harvard Case Solution & Analysis

 

Since, the many banks and financial institutions filed for the bankruptcy, stock exchange crashed, and economy suffered the worst situation in these years, indeed, only US economy but whole world suffered the financial crisis. On the other hand, when economy declines, then it is indication that services and good produced within the country were on decline. Which means that companies, and other institutions linked with the real estate market, and mortgage market also suffered. Therefore, the employment in the country declined, along the working capital as well............

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