Financial Crisis of 2007-2008, Lax Regulations or something Else Essay

Financial Crisis of 2007-2008, Lax Regulations or something Else - Essay Example Financial Crisis of 2007-2008, Lax Regulations or something Else Over the period of time, financial services industry went through extensive de-regulation with many institutions taking benefits of such lax regulations. Changes in regulations resulted into a shift in orientation and business strategies of the financial institutions. The focus clearly shifted towards managing short term performance rather than ensuring long term survival of the organization.( Allen & Snyder, 2009) Regulations alone however, cannot be termed as the reason for the financial crisis as there were multiple factors at play. Though lax regulations played their part but the changes in business strategies, changes in accounting standards, loose monitoring from the supervisory authorities, efficient market hypothesis as well as other factors were can be evaluated for their possible impact on the crisis. In this part of the paper, it will be argued that lax regulations were not the only reason for the financial crisis which emerged during 2007-2008. Financial crisis of 2007-2008 is considered as one of the worst economic and financial crisis since great depression of 1930s. The sheer size and intensity of the crisis has made it global because not only the developed countries were affected by the crisis but also the other developing countries were subject to crisis also. Besides creating the threat of the complete collapse of the leading financial institutions of the world, it also resulted into governments intervening by bailing out the financial institutions as well as other organizations.... The after effects of the financial crisis forced many developed countries to actually enter into strict austerity measures to deal with the growing public debt and fiscal deficit issues.( Aalbers, 2009) How Crisis Started The overall immediate cause of the financial crisis was the bursting of housing bubble in US wherein subprime mortgage holders started to default on their repayments. Over the period of time, US financial institutions started to lend to those borrowers who were technically not eligible to obtain the loans owing to their bad credit history and other factors. However, such borrowers also offered opportunity to earn higher returns as financial institutions attempted to profit from higher risks. Due to inflows from Russian as well as Asian financial crisis, financial institutions were left with excessive liquidity to offload in developed capital markets of US and UK. In order to utilize excess funds and banking on the lax regulations, financial institutions in US starte d to lend to borrowers with adverse credit history. This was accompanied by the boom in the construction sector of the economy also and financial institutions along with construction companies attempted to benefit from this. Housing bubble however, started to burst simultaneously at other developed markets also. Not only US suffered from the same but countries like UK also witnessed the cooling off of housing market and increasing rates of defaults on housing portfolio. Further, the crashing of the bubble created a contagion effect on other sectors of the economy also. As a result of this crisis and resulting tightening of credit by the financial institutions, other related industries such as automobiles