Report on Subprime Global Financial Crisis

            The subprime global financial crisis was started from a small corner of financial markets of the United States but it later generated long term impact on the overall global banking system. The business of financial banks and institute do not remain stable all over the year. Changes in the financial market, economic condition, and other macro-environmental factors causes to bring ups and downs in the business of financial banks. In the present work, the Subprime global financial crisis is discussed in detail that changed the whole financial market. Present work is based on the analysis of an article, macro policy analysis, and discussion about the consequences of collapse.   

Article Summary of Subprime Global Financial Crisis

Article title: Over the Cliff: From the Subprime to the Global Financial Crisis

The article is written by (Mishkin, 2011) on the subprime global financial crisis presents historical information and outcomes of this financial crisis. According to the article, the financial crisis was started in 2007. In the beginning, only a small segment of the US financial market was affected. Somehow later in 2008 the financial crisis was spread over the global market and reduces in the decrease of economic growth. Moreover, as a result of the subprime global financial crisis, a number of other economic changes came into the financial markets. Basically, the financial crisis was caused by the investment bank Lehman Brothers (Mishkin, 2011). According to the article, the subprime financial global crisis is also known as the subprime mortgage crisis. In 2007, BNP bank suspended shares redemption as a result of which housing prices started declining. In 2005, housing prices in the US market was at peak but continuous decline in 2007 resulted in huge financial losses. Moreover, the author also discussed Lehman Bankruptcy case in the article. According to the article, Lehman bank administration did not pay enough attention to the subprime securities related risk factors (Mishkin, 2011). Poor risk management strategies resulted in an increase in liability and debt. Subprime mortgage securities put financial instructions into endangering situation. Discussing precautionary measures in the article author wrote that a program was started to buy all assets entitles as subprime mortgage asset to provide support to the financial institutes to recover from the financial losses. Somehow, it is said that government debt ratio to the gross domestic product was projected to reach at very high levels in some economics over the globe. Basically, the article is focused on the explanation of the systematic risk. Adding evidence and arguments the author also presented details about extraordinary actions taken by the government and central banks in the financial global crisis (Mishkin, 2011).                            

Theory review and analysis of Subprime Global Financial Crisis

·         Consequences of Collapse of Subprime Global Financial Crisis

            The consequences of collapse are related to the changes occurred in the economic market and government debt ratios. Collapse supported an increase in the unemployment rate and the increase of inflation in the country. As a result of this housing prices were decrease rapidly. While on the other hand, the government debt ratio of increase. Even the interest rate was increased that supported inflation in the country. The subprime global financial crisis also increases unsustainability in the economic growth and stock investments trends. Liquidity and increase in debt of a number of companies and financial institute were also negative consequences of collapse (Mishkin, 2011).           

·         Macroeconomics Policymakers of Subprime Global Financial Crisis

            Macroeconomics policymakers made policies to handle this situation. At first, a program was introduced to purchase assets from the affected people to provide protection to these creditors and investors. Secondly, fed started providing its services for the government to accommodate profligate fiscal policy just by monetizing the overall debt of the government. Monetary policy and fiscal policies were introduced to overcome an increasing inflation rate caused by the subprime global financial crisis. Fed Open Market Committee decreased the interest rate as exceptionally low to regulate financial circulation in an effective way. Expansion in fiscal policy also simulated direct enhance in overall aggregated demand.       

Personal Opinion of Subprime Global Financial Crisis

            In accordance with my personal opinion, counterfactual should be taken into consideration while making effective policies related to such kind of global financial crisis. For instance, if we analyze the decisions taken by the Fed we can say that a decrease in the financial federal funds was the main cause the supported decrease in the interest rate. In case federal did not make decrease by 500 basis points (in 2007) then interest rate could remain stable and high. Moreover, in my opinion, the whole situation was also caused by poor risk management systems in the financial market regarding subprime financial mortgage securities.     

Recommendations of Subprime Global Financial Crisis

            After reading and analyzing the whole article about the subprime global financial crisis some recommendations are made that are presented below:

·         Financial institutes particularly banks should make their risk management system strong and effective (Mishkin, 2011).

·         Annual reports and financial statements should present risk factors associated with the securities in order to prevent such condition (Mishkin, 2011).

·         Financial institutes should directly communicate with their stakeholder and investors regarding financial loses.

·         Federal Reserve committee should maintain the optimal level of reserves. Moreover, the interest rate should be managed by considering the systematic risk factor.

·         Financial market performance should be monitored fully to predict such risks in advance thus proper plans for mitigation can be made (Mishkin, 2011).    

Conclusion on Subprime Global Financial Crisis

            The whole discussion concludes that poor management of risk, wrong fiscal and monetary policies, changes in the interest rate caused by the decrease in federal reserves, and inefficient management of Lehman brothers supported subprime global financial crisis in the financial market. A small corner of the financial market was influenced at the first that later influenced the overall global economy and increased debt in many countries. Analysis of the article shows that the financial crisis promoted a number of negative consequences for the economy. Considering the problems and consequences some recommendations are suggested according to which federal reserves and companies should make new policies to monitor risk factor. Effective strategies are required to be followed in order to present such situations in future also.          

References of Subprime Global Financial Crisis

Mishkin, F. S. (2011). Over the Cliff: From the Subprime to the Global Financial Crisis. Journal of Economic Perspectives, 25(1), 49-70.