'The global financial crisis (2007-2009) is an evidence of the Essay - 1

'The global financial crisis (2007-2009) is an evidence of the weaknesses of the existing international and national regulator - Essay Example An economy is a self-sustaining cycle with the financial activities in one sector rapidly spiraling its effects on many other industries thus crippling the economy1. The same was the scenario with the causes and rapid spread of the consequences of bad financial activities in some of the greatest economies such as the United States and the United Kingdom among others across Europe. Such ripple effects as increased unemployment and reduced government spending affects the purchasing power of the population thus resulting in the rapid collapse of economies as was the case during the financial crises. Major companies reduced their financial activities owing to the increasing cost of doing business. Most companies closed down while others reduced their sizes. Both the actions resulted in increased and prolonged joblessness that accounted for the breadth and depth of the crises both in the developed and developing economies. The Basel 2 accord provided for specific operational features of b oth investment and commercial banks. These included the amount of money that the banks ought to set aside for emergencies to cushion the economy from such shocks. Additionally, the regulations define the roles of both commercial and investment banks. Disregarding the laws including the repeal of the Glass-Steagall act in 1999 instituted by the Clinton administration was among the key causes of the crisis. The act sought to cushion from financial crises following the lessons learnt from the great depression. According to the provisions of the act, the government clearly distinguished commercial banks from investment banks. An effective regulation of the banking industry cushioned the economy from financial crises since banks could maintain appropriate financial activities2. By repealing the act, the government permitted commercial banks to take part in risky investments with the view of increasing their profitability. The repeal of the acct was an embodiment of the weaknesses of the regulation of the economy thus validating the escalation of the crises3. The liberation of the act, commercial banks began investing their money in the economy. Such big commercial banks as the Wells Fargo and the American Bank became active investors in the economy. Among the industries that appeared lucrative included the housing industry as the commercial banks increased their investments in the sector4. The American government for example, provided the citizens with incentives thus encouraging the citizens to acquire mortgagees and purchase homes. The banks saw that as an opportunity to invest in the industry and benefit from the increased financial activity in the market. Without any clear regulation, the government watched as commercial banks competed with the investment banks for the few investment opportunities. Before long, the economy began experienced declining liquidity as both investment and commercial banks both began lacking adequate money to stay operational. The deb t levels thus increased as most of the people who had acquired mortgages lost their jobs owing to the worsening economy and the increase in layoffs5. Commercial banks just as their names suggest make their profits from the financial transactions undertaken by their customers. They sustain the liquidity of the economy by availing the money whenever the customers want. This way,