With globalization, investors are always looking forward to better investment opportunities. Whenever they get an opportunity they grab it to remain competitive and gain more revenues. However, financial crises have sometimes been experienced even when people expected great profits. This paper relates a news article on “The Real Cause of the Financial Crisis” published by Forbes and Wild and Wild’s book, ‘The Challenges of Globalization’ on the issue of what causes the financial crisis. According to the article and the book, greed, new investment opportunities, and institutional failure lead to a financial crisis.
According to the news article, the rating agencies caused the recent financial crisis. The availability of mortgages led to the rise of housing prices. The mortgages were available because there was a high demand for investing in mortgages for their funding. When the mortgages were put together, the insurance companies, banks, and pension industry gobbled for them because the rating agencies were stamping them with top ratings (Rich, 2017). This is considering that the Congress had passed a law that allowed insurance companies, banks, and pension funds to treat mortgages that are highly rated like they would treat U.S Treasurys. Direct competition drove investment managers into buying the securities. Additionally, the securities came with safest ratings and attractive returns. If the rating agencies could have given fair ratings instead of the top ratings, the banks, insurance agencies, and even the pension funds would not have bought the securities at that rate (Rich, 2017). This would have prevented the financial crisis.
The article reports that the rating agencies gave the top ratings for their own selfish gains. Normally, institutions that create products pay the rating agencies for rating the products. This means that giving the ratings is their source of revenue. Only a few members of the agencies are endorsed by the government considering that financial products require a rating from the agencies as part of regulatory compliance. The article holds that the financial crisis was not caused by hedge funds, Wall Street, mortgage brokers, or the initiative by the government to promote ownership of homes which led to an explosion of mortgages to an extent of people who could not affordable them being given (Rich, 2017). Instead it was the rating agencies. The agencies saw an investment opportunity that could increase their revenues.
The article relates to Wild and Wild’s book on ‘The Challenges of Globalization’ on the causes of the financial crisis. The book identifies greed, new investment opportunities and institutional failure as some of the cause of financial crisis (Wild & Wild, 2013). For example, in 1997, investors saw an opportunity in investing in the Asian emerging economies. This drove up the prices of the assets to levels that were unsustainable. Eventually, they experienced a financial crash. In 2001, internet and telecom firms saw a boom of shares when people were excited over the web miracle. In the long run there were no profits again leading to a financial crisis (Wild & Wild, 2013). In 2008, investors saw investment an opportunity in buying the mortgage-related securities and ended up piling in the housing market leading to financial crisis.
Both the article and the book agree that financial crisis is normally a result of greed, new investment opportunities, and institutional failure. First, when people are greedy and want to make more money, they end up making a poor investment that causes financial crashing (Wild & Wild, 2013). The top ranking which led to the financial crisis was a form of an institutional failure fuelled by greed. Second, both the article and the book agree that new investment opportunities can lead to a financial crisis. In the article, the investors were grabbing investment opportunities (Rich, 2017). In the book, the crises have been caused by investors looking for new investment opportunities.
In conclusion, the news article shares similar views with the book on the causes of the financial crisis. The two agree that investors’ greed, the emergence of new investment opportunities, and institutional failures serve as causes of financial crisis. The article reports that the rating agencies’ greed influenced them to give misleading top ratings for more revenue. New investment opportunities for banks, pension funds, and insurance companies influenced them to invest in the securities. The two practices led to the financial crisis. Similarly, the book identifies greed, new investment opportunities, and institutional failures as the cause financial crises.
Rich, B. (October 5, 2017). The Real Cause of the Financial Crisis. Forbes. https://www.forbes.com/sites/bryanrich/2017/05/10/the-real-cause-of-the-financial- crisis/#5b7ab83d1765
Wild, J. & Wild, K. (2013). International Business: The Challenges of Globalization (7th Edition). Pearson.