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The Relationship between Financial Deregulation and Financial Crisis and the Origins of the Sub-Prime Crisis in the US

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The resultant changes in production structures and international trade have caused the pressures which gave way to economic turmoil, thus underscoring the limits to which deregulation may be actively pursued. Girron and Correa enumerate the occasions that banking crises arise: the active management of balances encounters mismatch problems. (2) when credit is concentrated in certain companies or sectors, such as oil or real estate; (3) when real interest rates are high during periods of lower economic growth; (4) when leverage levels are high as a result of rapid privatization or or (5) when these conditions are combined.

In their discourse, it is interesting to note that the paper, among other things, made observations that mirror the current (2007-2010) financial crisis, only their observations were made one decade earlier. The fiscal cost of restructuring or bailing out banks has been very high in relation to GDP, and that the cost of a banking crisis affects the level of economic activity and impacts adversely on the ability of financial markets to function efficiently for a long time. This could have been statement made of the bank bailout package put together in the various countries to arrest the spread of the credit crisis in 2008.

The general use of securitization as a tool for market expansion blurs the distinction between it and portfolio investments in terms of their impact on external accounts. This could also be said of the exotic instruments that exacerbated the subprime mortgage runaway. The securitization of credit has produced an expansion both in off-balance sheet activities and in non-banking financial intermediaries. Precisely, the creation and trading of default swaps (CDSs), collateralized debt obligations (CDOs) and mortgage-backed securities (MBS) are such examples of securities constituted on underlying debt that created off-balance-sheet movements that affected mortgage firms, insurance companies and securities brokerages (non-bank financial intermediaries).  

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