Thefinancial market in any country is a key driver to the economicdevelopment. Proper administration structures are important to thesuccess of any financial market. In addition to that, informationefficiency is also important to ensure that investors are wellinformed while making their decisions. This will help reduceincidences of financial markets collapse as it is well enumerated inthis paper with reference to Michael Lewis book The Big Short: Insidethe Doomsday Machine.
Thebook dwells about the securities market crash of 2008 in the UnitedStates of America. Lewis helps us understand how the mortgage bondsthat were subprime caused the collapse of the financial systems .as aresult a housing bubble was experienced in the country as individualsdefaulted on paying for their loans back to their respective as aresult some banks became insolvent and were unable to honor theirfinancial obligations (Lewis 50). Due to absence of properadministration system the mortgage bonds that were subprime weremixed up. The risky bonds whose values would easily fluctuate weremixed up with the safe bonds. As a result the investors were deceivedinto buying the bond s that later turned out to be improperlyadministrated. Thus, raising questions into the credibility of thefinancial market administration in the country (McNally 67). Thisraise the need for proper administration mechanisms to be put inplace for posterity success of the financial markets and to a greaterextent the stocks exchange.
Theother issue was the issuance of bonds on different levels. Impositionof high interest on mortgages had lower chances of paying back andlower interest rate onmortgages on mortgages that were to matureat a given time in future (McNally 67). This ended up acting as adistortion in the market creating high appetite for mortgages toeither buy build houses. As a result there was a high supply of housebut a low demand for them due to excess supply in the market. As aresult the potential customers were only willing to part with lesseramounts to pay for rent. This lend to high rate of default on payingback the mortgages by various banks clients. As a result variousbanks became insolvent. For example, the Deutsche Bank was owed byMorgan Stanley a sum total of $1.2 billion (McNally 67). The meltdown in the financial sector was due to failure to properly profilecredit worthiness of various customers which was an important thingto be considered right from the beginning.
Dueto indiscriminate provision of mortgages in the market excessliquidity in the market became a problem (Lewis 79).Hence, very manyhouse units were built at high cost due high demand for constructionraw materials during the construction boom in the country. Variousinstitutions were predicted to experience problem experts in thefield for example the Citigroup and Bear Stearns .Experts had warnedthey would experience financial woes due to their formation of swapsfor credit default. When the demand for housing units went down bankborrowers started defaulting on their loans which resulted in a hugenumber of claims being made on the firms offering swaps for thecredit default by those institutions that had hedged against thatrisk. The hedging firm became overwhelmed by the number of claims. Asa result they became bankrupt. However, the situation was easilypredicted given the high number of mortgage buyers including the highrisk group whose repayment was not assured. Meredith Whitney hadcorrectly forecasted the experiencing of difficulties by Citigroupand Bear Stearns who were offering the hedging services (Lewis 25).
Theother issues that arose were improper advice given by investmentsadvisors that misled investors. Who as a result invested heavily inswap for credit defaults that latter turned to be a totally differentfrom the market situation previously predicted. If they had advisedtheir clients well for example for example bank they would not havefallen victim of the bubble in credit. Heavy losses were incurred bythose banks and various investors too. The investments advisers knewthat betting was betting going on possibility of credit default themortgage holders yet the failed to raise issue to their clientsrepresenting failure to act in good faith. It would be expected asseasoned investments advisers they would have questioned thecredibility of the bonds (McNally 67). However, more investorscontinued buying the bonds that later suffered the default risk. Tocounter this government should be encouraged to come up withstringent measure to regulate financial market `s operations. Thisway the investors` fund will be safeguarded thus ensuring continuousdevelopment of the economy as whole through investments
Tofinality it is important to note the key functions of financialmarkets to the national economies. First, serves as an investmentstool to the local and foreign investors that bring in to the countryfor the foreign direct investments (FDI) .It is also important forboth statutory and self regulatory bodies to develop frameworks thatguide dealings in the market. They should also encourageprofessionalism to prevent incidence when investments advisers givemisleading information to their clients for example like the advisersat Wall Street who misled the clients. Furthermore, credit issuanceought to be controlled to reduce negative macroeconomic effects ofexcessive credit in the economy
Lewis,Michael. Boomerang:Travels in the New Third World.New York: W.W. Norton & Co, 2011. Print.
Lewis,Michael. FlashBoys: A Wall Street Revolt., 2014. Print.
McNally,David. GlobalSlump: The Economics and Politics of Crisis and Resistance.Oakland, CA: PM Press, 2011. Web.