One of the specific factors that can be attributed to the recent international financial crisis was the loss on housing mortgage loans due to the decline of mortgage prices in the market. A country like the US had more than $1.2 trillion losses that resulted from housing loans (Modigliani & Miller 433). This subsequently led to the increased rate of loan defaults and foreclosure among the mortgage lenders.
Moreover, banks and financial institutions relied on securities that were generated from the mortgage business. The securities were believed to have higher returns and lower risks. The decline in stock returns also led to the recent international financial crisis. The low interest rates in the financial and property markets attracted many investors to purchase the stocks at low prices. Consequently, this affected the lending standards in the financial and money markets (Taylor 12).
Weak regulatory mechanisms of the financial and property markets are also some of the major factors that can be referred to the occurrence of the financial crisis. For instance, the financial regulatory sector could not regulate the lending activities of the Lehman Brothers Bank.
It should be stated that the collapse of the bank led to the collapse of the financial system in the world due to uncontrollable lending transactions (Taylor 18). The financial regulatory sector also failed to control the house prices and interest rates in the market. The financial institutions took advantage of the loopholes in the lending policies and regulations (Modigliani & Miller 442).
Structural Problem in the US Economy
The lack of integration between financial institutions, the financial regulatory sector, and the modern practices of the current financial market are some of the structural problems in the US economy (Taylor 24). The regulatory sector lacks appropriate mechanisms that can be used to regulate financial innovations in the market. For example, due to structural problems in the financial sector, the NFA could control the activities of the commercial banks or develop appropriate strategies to ensure proper practices in the banking system.
The institution has also failed to control the annual borrowing rates from the financial markets. Prior to the financial crisis in 2008, annual borrowing rate in the country had risen to 18.9%, which was above the GDP ratio in the country (Modigliani & Miller 439). Consequently, this led to debt problems in America. The structural problem will force the government to initiate bailout plans, hence continue the cycle of financial crisis (Modigliani & Miller 437).
Structural problems associated with the lack of integration between the financial institutions and the regulatory authorities will lead to more economic and financial problems if they are not solved through the appropriate means. The poor financial structures will lead to more debt problems.
The magnitude of the problem may increase due to the global financial issues, which also affect the performance of the country’s economy. The changes in the global financial sector may affect the performance of the financial sector. Fluctuations in the exchange rate may lead to more financial challenges if the regulatory structure is not improved (Taylor 25).
Modigliani, Franco, and Miller Merton. “Corporate Income Taxes and the Cost of Capital: A Correction”. American Economic Review 53.3 (2010): 433-443. Print.
Taylor, John B. 2009, The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. PDF file. Web.