The financial sector in the world has been shaken to the core as people and home owners find it difficult to pay their mortgages making them impossible to have sufficient funds to run their normal lending programs. Furthermore, business and other investors fear investing in their mortgage based securities. Automatically, the mortgage based securities are becoming more toxic and no business or other investors will like to invest in this mortgage based securities making the financial institutions its reputation to finance its activities.
As a result, this commercial banks and financial institutions become cash strapped so that it will not be in a future to undertake its lending programs thus begin to be driven down the lane of financial instability and in the worst scenario bankruptcy. At such a situation, governments need to step in and arrest the unfortunate situation of affairs. The governments have decided to develop various programs and institute measures to cushion and eventually save the financial sector and the economy from the brick of collapse.
Various governments have designed various steps to arrest the havoc that is devastating the financial markets and their economies. These steps are aimed to jump start credit circulation, return market confidence and eventually stabilize their overall economy a move hoped to revive the otherwise dying financial system. Different countries have designed different rescue plans. These rescue plans are different in the amount of money it allocates to rescue efforts, its content, structure and in their respective names.
For example France have allocated 360 billion Euros to its rescue plan, of which 40 billion Euros are for recapitalizing banks and the remaining 320 billion Euros are used to guarantee bank lending. United States of America have allocated 700 billion US dollars to its financial stability rescue plan and the economic stimulus package. These rescue plans were both in the institutional and trading level. In the general view, these moves may help to stabilize the otherwise wailing economy to some extend but may also bring greater anxiety in the free markets.
The financial crisis was created from very diverse areas which include poor upward adjustment of mortgages rates making it expensive for home owners to pay, other cause are overextended borrowing, predatory lending by commercial banks, speculation, overbuilding of houses during the boom period, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps cancelled the risk of mortgage default, poor monetary policies, international imbalances, and lack of government adequate control in the financial sector.
The most singled catalyst that caused sub-prime crisis is the influx of money from the private sector and predatory lending by mortgage lenders as well as banks entering the mortgage market. Government interventions to economic issues may be seen by others as an open violation on the principle of the free markets operation but should also be noted that the governments should not sit back and watch its citizens languish in the abyss of economic difficulties.
More thinking has to be done in order to come up with more practical interventions that are comprehensive in nature to handle this unfortunate financial crisis that has already hurt millions of people and will continue to inflict million others. It is known that the financial crisis originated from the mortgage market, so the solution to this problem may be to address individual home owners paying the mortgage with a view to make them remain in their homes as ell as improving their purchasing power and savings. Below are various rescue contents of the rescue plans
Bank recapitalization This is the process of injecting fresh capital to banks, an initiative aimed at providing cash to selected main banks in their respective countries, banks that meet certain set criteria of conditions. These institutions are expected to operate under certain conditions to be decided upon by the government lending agencies. In such a scenario, the government is seen as a shareholder in the company and has rights to be included in the decision making process of the company. The aim is to provide more cash for the operation of the commercial financial institutions.
In this approach, it is argued that inclusion of the government in the decision making process may lead to delays in decision making as to the affairs of the commercial bank. In addition, governments may have bailed out the financial institutions without instituting proper or adequate measures or conditions on restructuring and improving its profitability. This move may create a bad precedent as it presents very weak incentives. The bank recapitalization may sound good but raises a lot of serious issues.
This move is short term, meaning that if the financial crisis periods extend longer than predicted, it may not stabilize the market and the government will have failed to handle the wrecking financial crisis. In addition, it is not guaranteed that the money received from the government will be used to meet the intended lending purpose because many governments have not put in place measures that will ensure that there is transparency and accountability in the use of the funds. The causes of the financial crisis can be attributed to so many factors and the government should widen its rescue plan to handle other sectors in the economy.