Investment Sight

Till 1987, nobody had a fear of the risk involved in financial market investment. But, the ‘Black Monday’ – October 19, 1987 showed the other side of risks involved in financial market. Many people brought shares and securities using margin values where the brokerage firms contribute a percentage of the amount for the investor to buy shares.

If the share or the security price goes down then the investor should pay back the amount contributed by the brokerage firms. So, when the prices of the shares had a temporary drop, every brokerage firms started margin call to the investors asking for the payment. Scares arouse among people and every investor started selling shares and there was no one to buy shares. Shares and securities were stagnated in the exchanges.

But the recession which occurred in 2000’s had different causes. Financial market crisis was related to unstable lending practices by many firms especially the real estate agencies. A steep increase in the price of food and oil added fuel to financial market crisis. Well established market giants also suffered considerable loss during this period and with the fall of Lehman Brothers on September 15 2008, situation became much worse. Trading got depressed and unemployment was prevailing all over the world. National Bureau of Economic Research declared the fact that United States is in recession.

Causes for the crisis:

1.  Public monetary policy followed by many private firms was considered as the main cause of the crisis. A sharp rise in real estate industry also added a major part. Drop in the prices of the mortgages was the main reason for the drop in real estate.

2.  Government activities during this period were also considered as a cause. Many regulations on security and property trading were relaxed to boost house loan firms to provide more loans to people.

3.  Many financial instruments were available in the market for assisting people in managing the shares and making more money. These tools are also known as ‘portfolio insurance’. This is software which can keep track of individual portfolio of investments. Most of these tools would have functionality where shares will be sold automatically if the price goes down to a certain specified limit. Only a very few companies like JP Morgan over looked into this risk involved and fell back from using the portfolio instruments.

4.  The systematic policy used by banks also contributed much. Low interests were charged for home loans and banks were ready to own the risk involved. The borrower can pay back the amount only if the real estate market continues to improve.

5.  Increase in the oil price during this period is also a significant cause for the crisis. The oil price had a huge fluctuation during the 2007 – 2008 periods.

As a summary the causes for the financial market crisis during 2000’s are excess money expansion, wrong calculation of the risk involved in the market and the unexpected response from the government.