Question

The Global Financial Crisis in the years of 2007–09 is regarded as a critical event in the history of financial development. Explain lessons learnt from the Crisis. It is argued that asymmetric information is one of the main reasons for the severity of the Crisis. Evaluate possible solutions to asymmetric information in financial markets.

Answer 1

   The financial crisis of 2007-09 has taught us that the confidence of the financial market , once shattered, cant be quickly restored.In an interconnected world , a seeming liquidity crisis can very quickly turn into a solvency crisis for financial institutions , a balance of payment crisis for sovereign countries and full blown crisis of confidence for the entire world .This financial crisis was the worst economic disaster since the stoke market crash of 1929. The aftermath of the crisis produced reams of new legislation , the creation of new oversight agencies that amounted to an alphabet soup acronyms like TARP , the FSOC and CFBP-most of which bearly exist today.

   Some of the shocking statistics of lessons learned from the crisis is as follows;

1)8.8 million jobs lost

2) unemployment spiked to 10% by october 2009

3) 8 million home foreclosures

4) Home price declines of 40% on average

5) S&P 500 DECLINED 38.5% IN 2008

6)$ 7.4 trillion stock wealth lost from 2008-09

8)Delinquency rates for adjustable rate mortgages climbed to nearly 30% by 2010.

Changes were made , laws were passed and promises were made in the world scenario.

Policy makers made critical decesions in heat of the crisis . The global banks were to fail was also the justification law makers and fed governers leaned upon to bail them out to avert a palanetory catastrophe that may have been several times worse than the crisis itself.

Asymmetric information is a problem in financial markets such as borrowing and lending . In these markets, the borrower has much better information about his financial state than the lender.

Solutions of asymmetric information problem ;

1)To create opportunities for greater access to information to consumers

2)Guarantees and warrantees to consumers

3) Providing taxes and subsidies

4) industries may set a few preconditions for providing the goods and services

5) Monitering and controlling

6)Licencing and liability rules

The problem of asymmetric information is a everlasting phenomenon that is expected to prevail due to a difference in perception and also a lack of smooth communication.