The Financial Crises and The Collapse of the Lehman Brothers - ABD Essay

The Financial Crises and The Collapse of the Lehman Brothers - ABD - Essay Example The role of governments and that of economic theories had an equal amount of role to play in the control and monitoring function and the predictive ability and risk measurement respectively. The study of such indicators helps to understand and appreciate the importance of non financial factors as a cause of the recent financial crisis that shook the entire world (Kotz, 2009). The aftermath of the great financial crisis helps us to reflect upon the shocks experienced by the policy landscape and government policies and greed of bankers and the plight of the taxpayers. This has brought to focus, the need for enhancement of the role of the government in regulating and controlling the systems of the market from the inadequacies and the excesses. Also linked with these issues is the problem with moral hazards. The role of moral hazard has been identified to be central to the causes of the recent crisis and the learning from the controversy that can be drawn (Engelen et al., 2008). A moral hazard can be clearly defined as the responsibility of one party towards the interest of the other but where the interests of the former attain priority. For example, a person sells a financial product to the other but chooses only those funds for sale which provide him with the highest bonuses but might not hold any interest of the buyer. The risks associated with it are mutually borne by the seller and the buyer. The subprime was a typical example for the moral hazard theory where gains and social losses were privatized (Godechot, 2008). Financial risk management failures were caused primarily due to the ignorance of the systematic interaction between the different risk elements of the process. There were modeling errors that were based on the assumption of normal markets and ignored abnormal market situations. Such practice made the financial risk management system more prone to crisis rather than being less exposed. Credit default swaps and collateralized debt