The paper “ Financial Engineering Reason for the Financial Crisis” is a meaningful variant of the case study on macro & microeconomics. “ National and international policymakers should try to reduce the frequency of banking and financial crises. Argue for three different policy measures that would be helpful to reduce the frequency of banking and financial crises. In each case indicate whether the measure you propose requires international coordination or could be implemented in individual countries even if other countries declined to implement the same measure. ” IntroductionFinancial crisis is sown when countries liberalize their financial systems, usually several years before the crisis hits (White, 2008).
This theory can be seen unfolding in the US economy which is responsible for the financial crisis that gained global proportions. The government policies as well as the banking sector can be largely held responsible. Paul Krugman, a Nobel Prize-winning economist wrote in the New York Times that after the 1997-98 Asian Financial Crisis, countries in that part of the world started protecting themselves against future currency corruption by creating huge reserves of foreign revenue and assets and by exporting the added capital to the West.
This export of assets was in terms of real estate primarily, thereby driving up the prices of real estate in the West by leaps and bounds (Krugman, 2009). Another event that led up to the financial crisis in the USA also has its origin in Asia. Asian economies generated large current account surpluses that they invested in US dotcom stocks leading to a boom in the NASDAQ. This created a dotcom bubble which burst in 2001. The US Federal Reserve responded by easing monetary policies between 2001 and 2004.
The repercussion of this led to a bubble in the housing sector “ Risk premia hit low levels and leveraged deals became common as investors chased yields in an environment of lax regulatory oversight” (McKibbin & Stoeckel, 2009)The Sub-prime FactorAlan Greenspan, former Chairman of the Fed, described in Congressional testimony as a “ once-in-a-century credit tsunami” .
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