The world financial crisis: what is the solution?

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The world financial crisis: what is the solution?

If you are reading this article because you think I have come up with the ultimate solution to our current global financial crisis, then I am really sorry to disappoint you. I have no idea, only time will tell us the right solution. In this article I am going to explore the current proposals and some of the ideas that have been put about and just cast my humble opinion upon them, so I hope you find it useful nonetheless. Now unless you have been living in a cave or a desert island in the pacific you will be fully aware of the financial chaos that has recently been wreaking havoc upon the worlds markets. It's pretty safe to say that the current situation eclipses the events of 1929, which, although disastrous, is superseded by the sheer volume of money involved at present. We are not just talking hundreds of billions, but trillions in some cases, figures the likes of which would seem incomprehensible in that day and age.

So what is it all about and how did it happen? It is basically about liquidity. By liquidity I mean money in the markets. Money to the economy is like oil to an engine, no money, and the engine will seize and seize it has. Basically lenders globally have been lending money to customers, now I am sure you will have heard the saying a business either grows or it dies well in order for lenders to grow they have to continually lend more and more money. So what happens when all the good clients out there have all the money they want? Well then the lenders lower their standards and then they can lend to more people. The problem is once one lender does this they all have to start or be left behind by the others. Competition dictates that all the lenders then have to start lowering their standards in order to stay in the race. How exactly has this resulted in the situation we have today? Well the obvious result of reducing your standards especially to your borrowers is essentially you leave yourself open as a lender to a greater risk. There are reasons why some people should not be granted a loan and that reason can be as simple as they may not repay it. It has to be said that over recent years this has been classed as an acceptable risk to lenders. But years of this sort of lax lending has resulted in lenders with very high risk lending books with poorer prospect of ultimate recovery of the debt.

This then creates a domino effect so that global lenders lose confidence and are reluctant to lend more money. Well, a high street lender that has no more money to lend is about as useful as a chocolate fireguard, so they go out of business as customers start to leave. In the case of banks and building societies, these lenders also have depositing clients. These customers receive interest on their deposits, but the banks also use their money to lend out to their borrowing clients. If the borrowing clients subsequently fail to repay their loans, the lenders stop lending out money and then the depositing clients lose confidence and want to get their money back out. And so the bank or building society collapses, with no good customers' money, no more money lent to them and a whole heap of bad unpaid debt. This lack of confidence then transfers onto the stock market, ending the house of cards.

But what solutions to these problems are being proposed?

To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing their clients money with tax payers' money. This move was clever as it instilled clients with confidence, which is what has been lacking over the past months. There may in many cases be no need for a bank's downfall at all, but when people get nervous, they tend to bolt at the first sign of uncertainty, which can be the cause of a bank's unnecessary demise. Boosted confidence means that people are happy to stay put so that the banks' assets are not undermined.

As a second move, the US and UK have proposed enormous bailout packages which are too intricate and complex to be explained here. The simple explanation is that they want to buy into these financial institutions with tax payers' money. It is unclear if this will prove an effective measure, as only time will tell if this move is a good one or not. If this move does nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the movement of money at the moment is likely to put us all in to the worst recession the world has ever seen.

What is blindingly obvious is the fact that there must be a major overhaul of the way the system functions. From a financial advisors point of view, although there are certain regulations in place, the emphasis is sometimes being focused on the wrong areas. Because the financial institutions have been riding high on a wave of success over the past decade, their practices have not been scrutinized as thoroughly as maybe they should have been for fear that they would be seen as being restricted or that there was were accusations of malpractice. But you have to ask yourself- if the conduct of the lending institutions had been more closely monitored so that codes of practice had not been flaunted, to such a degree there would appear to be no such thing as bad debt, would we have been witness to the type of financial catastrophe the world has just experienced? I think you know the answer to that one.

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If you are reading this article because you think I have come up with the ultimate solution to our current global financial crisis, then I am really sorry to disappoint you. I have no idea, only time will tell us the right solution. In this article I am going to explore the current proposals and some of the ideas that have been put about and just cast my humble opinion upon them, so I hope you find it useful nonetheless. Now unless you have been living in a cave or a desert island in the pacific you will be fully aware of the financial chaos that has recently been wreaking havoc upon the worlds markets. It's pretty safe to say that the current situation eclipses the events of 1929, which, although disastrous, is superseded by the sheer volume of money involved at present. We are not just talking hundreds of billions, but trillions in some cases, figures the likes of which would seem incomprehensible in that day and age. 
So what is it all about and how did it happen? It is basically about liquidity. By liquidity I mean money in the markets. Money to the economy is like oil to an engine, no money, and the engine will seize and seize it has. Basically lenders globally have been lending money to customers, now I am sure you will have heard the saying a business either grows or it dies well in order for lenders to grow they have to continually lend more and more money. So what happens when all the good clients out there have all the money they want? Well then the lenders lower their standards and then they can lend to more people. The problem is once one lender does this they all have to start or be left behind by the others. Competition dictates that all the lenders then have to start lowering their standards in order to stay in the race. How exactly has this resulted in the situation we have today? Well the obvious result of reducing your standards especially to your borrowers is essentially you leave yourself open as a lender to a greater risk. There are reasons why some people should not be granted a loan and that reason can be as simple as they may not repay it. It has to be said that over recent years this has been classed as an acceptable risk to lenders. But years of this sort of lax lending has resulted in lenders with very high risk lending books with poorer prospect of ultimate recovery of the debt. 
This then creates a domino effect so that global lenders lose confidence and are reluctant to lend more money. Well, a high street lender that has no more money to lend is about as useful as a chocolate fireguard, so they go out of business as customers start to leave. In the case of banks and building societies, these lenders also have depositing clients. These customers receive interest on their deposits, but the banks also use their money to lend out to their borrowing clients. If the borrowing clients subsequently fail to repay their loans, the lenders stop lending out money and then the depositing clients lose confidence and want to get their money back out. And so the bank or building society collapses, with no good customers' money, no more money lent to them and a whole heap of bad unpaid debt. This lack of confidence then transfers onto the stock market, ending the house of cards. 
But what solutions to these problems are being proposed? 
To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing their clients money with tax payers' money. This move was clever as it instilled clients with confidence, which is what has been lacking over the past months. There may in many cases be no need for a bank's downfall at all, but when people get nervous, they tend to bolt at the first sign of uncertainty, which can be the cause of a bank's unnecessary demise. Boosted confidence means that people are happy to stay put so that the banks' assets are not undermined. 
As a second move, the US and UK have proposed enormous bailout packages which are too intricate and complex to be explained here. The simple explanation is that they want to buy into these financial institutions with tax payers' money. It is unclear if this will prove an effective measure, as only time will tell if this move is a good one or not. If this move does nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the movement of money at the moment is likely to put us all in to the worst recession the world has ever seen. 
What is blindingly obvious is the fact that there must be a major overhaul of the way the system functions. From a financial advisors point of view, although there are certain regulations in place, the emphasis is sometimes being focused on the wrong areas. Because the financial institutions have been riding high on a wave of success over the past decade, their practices have not been scrutinized as thoroughly as maybe they should have been for fear that they would be seen as being restricted or that there was were accusations of malpractice. But you have to ask yourself- if the conduct of the lending institutions had been more closely monitored so that codes of practice had not been flaunted, to such a degree there would appear to be no such thing as bad debt, would we have been witness to the type of financial catastrophe the world has just experienced? I think you know the answer to that one. Article Source: <a href="http://www.allbestarticles.com" target="_blank">Credit Card Bad Credit People</a> About the Author: Mortgage Route gives information help and mortgage advice from qualified <a href="http://www.mortgageroute.co.uk">mortgage brokers</a> along with no obligation <a href="http://www.mortgageroute.co.uk">mortgage calculators</a> and sourcing tools. Click here to get your own <a href="http://www.uberarticles.com/home.php?id=247677&p=1221">unique version of this article</a> with free reprint rights.