Financial crisis: causes and possible ways to overcome

The article describes the main stages of the financial crisis that include: a series of foreshocks, which began in August 2007 and continued as a recession that lasted until August 2008 when three major United States' financial institutions failed to resolve liquidity problems; the severe financial shock in September 2008 when ten major financial institutions changed their institutional structures; financial panic and the beginning of the great recession in the real sector of economy in the last few months of 2008; the end of financial shock and panic at the beginning of 2009 to become the starting point of financial restoration and the recovery period in the real sector of economy. The article examines the main factors of financial crisis, which show all the causes and their interrelation, so they can yield a complete picture. Credit bubble: since the late 1990s, China and other major developing countries, as well as major oil-producing countries have created large capital surplus, which was invested in the financial markets of the United States and Europe, and resulted in interest rates beginning to fall. Credit spreads narrowed, meaning that the cost of borrowing to financially risky investments declined. Housing bubble: since the late 1990s and the early 2000s, there has been a great and stable housing bubble in the United States, which was characterised both by national increases in housing prices and rapid regional boom-and-bust cycles in California, Nevada, Arizona, and Florida. Mortgaging: there have been observed overly optimistic assumptions on housing prices in the United States, as well as problems in primary and secondary mortgage markets. Trillions of dollars in risky mortgage have been widely implemented through the financial system. Credit ratings and securitization: errors in the credit rating and securitisation were being transformed into "subprime" mortgages, in unreliable financial assets. Credit rating agencies made a mistake of overestimating the rating value of mortgage-backed securities and their derivatives, such as a safe investment. Financial institutions purposefully increased risk: the leaders of many large and medium-sized financial institutions in the United States transferred their huge savings into high-risk financial instruments in the form of mortgage-backed bonds. This precipitated the collapse of large financial institutions. Serious failures in corporate governance and risk management in financial institutions vitally important to the functioning of the entire system were the primary cause of the financial crisis. Financial shock and panic: bankruptcy and restructuring of a dozen firms in September 2008 has caused the global financial panic, confidence in the financial system began to dissipate along with the smashups of large and medium-sized financial institutions in the United States and Europe. Additionally, the article suggests ways to overcome financial crisis. Governments should adopt a mixed strategy of short-term and long-term actions, there is also a need for interactive activities across the globe, based on the conduct of similar policies (monetary expansion), realised by national governments. Such actions may include the following: to revive interbank lending, providing a temporary guarantee for short-term unsecured loans between regulated entities. It is necessary to provide reliable insurance for bank deposits, to take measures for recapitalizing the banking system with public funds. The central bank interest rates should stay low. It is crucial to restore financial systems and to introduce a banking union in the euro zone as well as develop and implement particular plans for medium-term fiscal adjustment and entitlement reform in Japan and the United States. The plans should be reinforced with specific actions. There is a need for increasing production level, especially, in the euro zone and Japan. Putting into practice is possible through reforms that create equal conditions for both existing and new market players of the labour market and reduce barriers to provide access to goods and services markets. It is important to carefully change the course of the U.S. monetary policy with due regard to changing growth prospects, inflation and financial stability. Besides, measures should be taken to preserve financial stability, taking into account the risks inherited from the recent credit booms, and new risks arising from capital flows. Many countries are in need of a new round of structural reforms, including investments in government infrastructure, removing barriers to provide access to goods and services markets and, in case of China, redirecting growth from investment to consumption. The article attempts to answer the question: "Was it possible to prevent the crisis?" It would also be helpful to set limits to human greed, distribution of tools, the prices of which are based on complex calculations, financing of bonds to prevent people from buying ten times more than they can afford and to avoid magnifying demand.

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