Effect of financial crisis on consumer finance Essay

Effect of financial crisis on consumer finance - Essay Example The complexity of financial instruments that were involved in the crisis deepened the effects of subprime mortgage crisis (Ghoshi, 2006). The subprime crisis led to a number of problems in America’s as well as the global financial system. As home owners defaulted on payment of their mortgage costs, financial institutions were drained off liquidity necessary for lending. It also led to reduction of revenues generated by many financial institutions as well as other organizations whose operations were adversely affected by the turbulence on financial markets. This led to decline in economic growth rate, forcing the United States of America and United Kingdom of Britain to record negative gross domestic product growth. Ben Bernanke, a leading economist and the Chairman of Federal Reserve in US indicated that the Federal Reserve policies are not the main cause of the crisis and its subsequent reduction in access of consumers to credit. He noted that while the US financial policies are partly to blame, other countries policies such as currency management policies in China make the global economy more prone to financial crisis (The Washington Post, 2011). In a debate moderated by the char of economics department in Harvard University, important facts about the recent global financial crisis were revealed. The subprime crisis significantly reduced the willingness of financial institutions to extend credit to consumers.... In a debate moderated by the char of economics department in Harvard University, important facts about the recent global financial crisis were revealed. The people involved in the debate were economics professor Jeremy, and Professor Rogoff, both from the institution and a history professor Nial. Roggoff noted that while the lending policies were lax, the outsider attitude of customers equally catalyzed the 2007/2008 global financial crisis. This led to low cooperation between financial institutions and their mortgage customers, accelerating the rate of the 2007/2008 global financial crisis. Roggof had predicted the crisis one and half years earlier (Crimson Staff Writers, 2010). Analyses The subprime crisis significantly reduced the willingness of financial institutions to extend credit to consumers. Such institutions withheld liquidity as panic and loss of confidence spread in the financial sector. This led to fall in consumer lending since 2007 to 2008 (Bricker et al, 2012). The v alue of loans issued in US in 2008 last quarter of the year was almost half of the value of loans issued during the same period in the previous year. Lending declined across all credit lines, including that of short term and consumer lending. Majority of the banks that were vulnerable to bank run during the crisis cut on their spending. Banks with average level of deposits to assets cut on their loan originations by 36% between August and December in 2008 as compared to the same period in the previous year. The recent subprime mortgage crisis resulted to economic recession. During economic recession, the demand for loan able funds decline. This was evident in 2008 to 2009 when business activity declined and unemployment shot up in many countries. This reduced the