Macro and Micro Causes of Financial Crisis Essay

Words: 2220
Pages: 9

Corporate and Wholesale Finance - 12BSP053

“Since 2007 to mid 2009, global financial markets and systems have been in the grip of the worst financial crisis since the depression era of the late 1920s. Major Banks in the U.S., the U.K. and Europe have collapsed and been bailed out by state aid”. (Valdez and Molyneux, 2010) Identify the main macroeconomic and microeconomic causes that resulted in the above-mentioned crisis and make an assessment of the success or otherwise of the actions taken by the U.K government to resolve the problem.

By Alistair Walters – A913910


Five years on from the beginning of the worst financial crisis he world has seen we are still in a perils state of low or negative growth and low interest
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Valdez and Molyneux (2010) state that it was the aforementioned factors, which “distorted the macroeconomic structure of the UK and US.” and ultimately led to its downfall. Micro Economic Factors Consumer inertia meant that most were not willing to change from their current banking provider believing that their money was safe and that changing was more trouble than it was worth. Actually their money was tied up in a complex system that even many of those entrusted to invest their money were unsure what truly went on. The inertia meant that banks were able to do almost what they pleased without the fear of consumer reprisal. Another important microeconomic factor was the high levels of corporate leverage in investment firms took on. In the continuous hunt for higher gains, investment managers sought a greater return on equity (ROE). The simplest way to do this was take on a greater level of debt to invest therefore reducing the debt to equity ratio and increasing ROE. This created “fragile institutions” in an “unstable financial system.” (BIS, 2009). Performance Incentives played an important role as traders and investors alike looked to take on higher risks as ROE was linked to bonuses and their pay packets. This meant that