There has been a great hue and cry across the globe regarding the global financial meltdown which happened in recent past. This global meltdown lead to closure of many big business units, trimming down many jobs, procreating white elephants, shattering emotions of investors and leaving the entire world balled over.
The causes to such meltdown happening worldwide were many, few predictable while few unknown; but the one and the major cause of such turmoil was Subprime mortgage crisis of USA. As the word suggests subprime is something that isn’t prime. In Sub-prime context it simply means to lend money to the sub-prime borrowers (which is lending to people having low or none creditworthiness). The US lending terms were very lax on account of which the whole crisis took birth fanning out eventually in the entire world leading to global financial meltdown. Much introspection has already been done to know the causes of Sub-prime crisis which lead to this financial meltdown.
It all started from the financial innovation after the invention of derivative contracts on the basis of theory of probability. These were considered as most effective instruments which could measure the price risk. Application of these instruments in open market proved favourable most of the times which fortified the logic of using such instruments. Most of the investments banks in US after this, developed such innovative products and instruments for a better measurement of risk in the financial market. Moreover most of the markets were connected with American markets so any change in American market would lead to have a garbling effect across the globe.
All these innovations and boom in the financial market caused to create an economic bubble of enormous size and the repercussions of the bubble burst was not taken in to the consideration by the economists. Bubble became larger and larger as more people started getting benefits of the boom in the market. However the most unpredicted bubble burst by economists turned in to a reality revealing many secrets and flaws in the financial market. Most of the investment banks suffered a great loss in the value of mortgage back securities which were primarily made up for the customers with low creditworthiness. There was a phenomenon which was named subprime crisis which took birth here that perforated the enormous bubble, leaving the entire globe jolted.
This financial meltdown lead to the bankruptcy of world renowned banks as Lehman brother, various stock markets plunged, various other financial institutions filed heavy losses and the crisis left much more disastrous effects within US and the globe.
The end result of the financial meltdown is manifesting itself in myriad ways. US and the world both have implications to the crisis may it be direct or indirect. Thus it is very important to study the implications of the financial meltdown, how it happened, what all lacunas were found at various levels because of which crisis happened? The role of different parties involved, how India got affected? How to hedge your portfolio against such crisis? And last but not the least largely the solutions to the crisis for entire world economy. However much introspection has been done only on the causes of such crisis and meltdown.
There is a need to re-envision and re-focus on the operation of world economy and financial markets and provide a multinational safety net to forclose such meltdown in future.
There is a need to give justice to the call for the modification of unbridled growth, perilous financial innovations and deregulation in the financial sector along with the emphasis on the need for judicious lending, effective securitization, and asset-liability management.
The implications of this topic are global so anything that is so large in magnitude and is encumbrance to the growth of world financial system such a problem needs to be resolved otherwise will have a cataclysm effect.
Financial innovation Argument base:
Research paper Prof: Pramod Yadav
Warm regards,
kinshuk.
