How the global financial crisis revealed a lot concerning the financial system.
Many institutions suffered because of the crisis, and this revealed a lack of proper preparedness in many companies in case a financial emergency occurred. Some businesses had to be bailed out by the government, while others ended up closing down. Still, others managed to pull out of the crisis. Many individuals and families suffered during the crisis. Many people lost their jobs and others lost their homes and other properties because they could not afford to pay their mortgages and other expenses. The crisis made people change their consumption behavior and manage their finances more appropriately. Because of the crisis, many people have reduced their consumption habits, and they have been able to increase their savings because of this. A major cause of the crisis was the credit bubble. Banks increased their risks as they lowered their interests, and in the process, encouraging many people to take mortgages (International Monetary Fund, 2011). Some people were not able to pay after the increase in interest rates and this meant that the banks had to repossess their homes. With such risks, banks ended up suffering huge losses.
The government lowered the interest rates during the crisis, as there was no more liquidity in markets. It reduced the federal funds rate to zero and bought longer-term assets. Investors are encouraged by falling risks and economic growth in the regions of investment. They are also concerned with returns and market liquidity. The concerns of the investors increased during the financial crisis, and as many markets closed down, investors increased their concerns for liquidity. Although lower interest rates encourage investors to borrow, it has not decreased the level of concern among investors concerning the risk of the interest rates. Many investors do not want to risk taking funds and other capitals at low rates, only to pay highly after the interest rates increase (International Monetary Fund, 2011).
Reference
International Monetary Fund, 2011. Long-term investors and their asset allocation: where are they now? [Online], Available at: www.imf.org/External/Pubs/FT/GFSR/2011/02/pdf/ch2.pdf [Accessed 18 April 2013]
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