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The possible causes of the current financial crisis, its complex nature, and the difficulty in resolving this crisis.

The current economic situation in the world is very unpredictable and nobody knows the consequences of the current financial turmoil. In the perspectives of many economists the causes they perceive are different and there is no consensus about the causes of the current financial turmoil. However, majority of economists agree the financial crisis is unprecedented and it is a challenge to market economies. As well, they all agree the effect of this crisis is complex in nature and its unpredictability. In this context in this article I will discuss some causes and the reasons behind the arguments and their validity. As well, I will explore the feasibility of the solutions proposed and their ability to overcome the financial crisis.

The Causes of Financial Crisis Perceived by Most Market Economists

Most market economists argue the present financial crisis is caused primarily by sub-prime mortgage crisis in US and some bad banking practices by some major financial institutions and excessive greed. In effect the current financial crisis is caused by the liquidity crisis of banks. Based on this argument major central banks in US and in Europe partially nationalized the banks and injected massive amount of money in to the financial system to resolve the liquidity crisis using tax payer money to bailout the failing financial institutions in US and in Europe.

However, after the intervention by the financial authorities in these countries did not improve the ability of the banks lending to each other and also increasing lending to businesses and households. In addition, the stock market volatility and uncertainty prevails by the lack luster performance of the major stock exchanges through out the world. In effect, the investor confidence did not come to normal due to the financial crisis and credit is still very scarce. This shows the credit crunch is very complex in nature and more measures are necessary to resolve this unprecedented financial crisis, which is described by some media and financial commentators as the crisis is the worst after the great depression in 1930’s. In other words, the causes of financial crisis as perceived by many market economists are very simplistic and it may be due to structural problems in the economy and in the financial system as well as due to subjective factors.

In the IMF outlook for the near future is very bleak and they forecast a world recession or very slow economic growth for most countries and some economies will be affected badly like some Asian economies and in Africa. In this context, it can be said the effects of this financial crisis is very extensive and very deep and unprecedented compared to the crisis in 1980’s. This may have the effect of increasing the financial crisis further for many economies. In addition, in Australia the government has taken steps to guarantee depositors their money and also has introduced a fiscal stimulus package, which is 10 billion dollars to combat the recession as predicted by IMF. This shows the severity of the financial crisis and its unpredictability and its effects and the difficulty to resolve my one method alone.

However, in some economists point of view the credit crunch is due to many factors and it was due to the conditions before the credit crunch as well as due to the enormous increase in financial derivatives particularly of mortgaged backed securities all over the world. That is the speculative character of these securities have produced the asset bubble to burst and it is the major cause of the credit crisis. The financial, derivatives have increased in volume over the current decade world wide. In addition, the savings of China as an emerging economy and very primitive consumer and other avenues of investment would have searched for a return on investment elsewhere in the world would have also caused this financial crisis. In effect according to these economists the credit crunch is due to many factors and it is not simplistic and very complex in nature. Some even suggest it is due to the nature of the capitalist system itself and it is due to the structural problems of the market economy particularly of the left leaning economists.

For example according to former US Treasury boss Alan Greenspan the credit crunch is due to savings of emerging economies and low savings in some economies, low interest rate before the credit crunch, low inflation, increase in the trading of financial derivatives, economy overheating, cheap and freely available credit, lenders leveraged their collateral, Mergers and acquisitions fueled by leveraged buy-outs, rising asset prices and glowing consumer confidence.

Conclusions

As discussed above the current credit crunch is very complex in nature and it is caused by many factors and may be due to some market economy structural issues as well. There fore, in my view and according to recent evidence of volatility after the solution based on the liquidity problem as the cause of the crisis it can argued that the simplistic analysis is not an objective one and other complex factors are at work as the major cause of this financial turmoil. Until this is recognized and co-coordinated action is taken and prudent regulations are in place this crisis is very difficult to be resolved.