The paper "How Has the Financial Crisis Affected the Economy? " is a good example of a literature review on macro and microeconomics. The term financial crisis has been defined differently by different authors. Generally, it is described as a condition in which the hypothetical value of financial assets drops unexpectedly Bernanke (10). It can also be defined as a situation in which the demand for money is more than its supply. The financial crisis is, therefore, a broad term that can be applied to a variety of situations such as recessions and bank runs.
Currency crises, financial bubbles, and crushes and sovereign defaults can are all termed as financial crises. Regulatory failures, imperfections in human reasoning, asset-liability mismatch, ignorance, and increased borrowing are the leading causes of financial crises in the world economies. Financial crises are contagious since they spread from one state to another. The 2010 annual report by the bank for international settlement financial crises cause recessionary effects Mcdonald (56). McDonald (24), points out that governments play significant roles in extenuating financial crises through monitoring the financial departments.
According to Smithers, the main objective is to achieve transparency and ensure that institutions have sufficient assets to meet their fiscal targets (123). Some scholars argue that excessive regulation is the major cause of financial crises. On the other hand, other scholars have blamed major financial crises on insufficient monetary regulation. For instance; the crisis of 2007-2008 is attributed to regulatory failure. This results in the global recession. One of the most common regulatory measures is the reduction of interest rates. This crisis threatened the complete fall down of major financial institutions globally James (123). Recently, interest rates have been maintained at low levels of Nordhous (123).
The rationale behind low-interest rates is to ward off the risk of financial disturbance and offset deflationary forces. Similarly, given that fiscal disruption which led to what is commonly referred to as ‘ the great recession’ ; low-interest rates have been effective in countering high borrowing costs due to widening monetary spreads. It is evident that financial policy measures promote borrowing and discourage saving King (145).
Bank for International Settlements. 80th Annual Report, June 2010.
Benoît, C. Public Lecture ECB, at the International Center for Monetary and Banking Studies, Geneva, 9 October. 2013.
Bernanke, Ben S. "Monetary Policy and the Housing Bubble." At the Annual Meeting of the American Economic Association, Atlanta, Ga., Jan. 3, 2010.
James, B. "Seven Faces of the Peril.' " Federal Reserve Bank of St. Louis Review, September-October 2010, Vol. 92, No. 5, pp. 339-52.
McDonald, L. and Robinson, P. A Colossal Failure of Common Sense: The Inside Story Of the Collapse of Lehman Brothers. New York: Crown Publishing Group, 2010.
Smithers, A. The Road to Recovery: How and Why Economic Policy Must Change. West Sussex: Wiley, 2013
Nordhous, W. The Climate Casino: Risk, Uncertainty and Economics for a Warming World. New Haven: Yale, 2013.
King, S. When the Money Runs Out: The End of Western Affluence. New Haven: Yale 2013
Mark, B. Austerity: The History of a Dangerous Idea. Oxford: OUP, 2013.
Morris, C. The Two Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash. Newyork: Public Affair, 2008.