All praise is due to
Allah, may peace, salutation and the blessing be upon the prophet Muhammad (ﷺ), his entire family, his
companions and those that follow their footsteps with righteous until the last
day. Indeed, behavioral finance play vital role in finance and it tells us how
people behave in finance. In general behavioral finance is the combination of
both psychology and Economics. Moreover, how individual perceived in an economy
varies due to their behavior for that reason, their financial behaviors are
different. The all kinds of crisis occur because of the behaviors of the people
in regard to the finance etc. however, financial crisis according to the
research 2008 finance crisis is said to be most serious crisis ever happen in
history of the great depression and it has been the talk of the world “as an eye-opener
of the other finance institutions” to learn from very vital topic.
Furthermore, there are so many reasons for 2008 financial crisis one
of which are detrimental to the economy progress and development:
New Market Failure.
Financial frictions and lack
of system insurance.
Securitizing of Loans.
Growing current account
deficit and lower interest rate.
US Government pushes to
housing and mortgage e.tc.
Firstly
New Market Failure, increase a lot
and suddenly in number and perhaps more deceives, well beyond the outer limits of the evident asymmetry paradigm,
profoundly involving the newer and a smaller amount of familiar
territory of the collective cognition and collective action
paradigm.
Secondly financial frictions and lack of
systematic insurance, this led the amplification result of
influence that were not accurately internalized by individual agents. As a
result it lead to undervalue the social advantage of liquidity in crisis state
and take over the socially undue level of systemic risk, primarily via leveraging up steeply and with excessive dependence on wholesale short-term
subsidy (Brunner Meier 2008; Brunner Meier and Pedersen 2008;Korinek
2010).
Thirdly Securitizing of Loans, is among the
reason of 2008 financial crisis in which the mortgage lenders securitize their
loans that permit them to eliminate all danger of affections or exposures;
it is a requirement before you borrow mortgage, you must give your real assets
as collateral to receive the loans. Moreover, if the borrower is unable to
settle the loans the institution of mortgage banks will take the ownership of
the real assets used by the borrower as collateral. As result the debt is
always in progress everyday increasing goods and services at the increasing
rate in their system.
Fourthly growing
current account deficits and Lowering of interest rates, this is the main reason for 2008
financial crisis it has been designed in such way that default cannot be avoided because
the way they designed their system; this also cause the lack of physical cash
in their system which lead to the people facing a lot of difficulty. Moreover,
people became the slave of financial institution because of the adverse effect
of increasing of debt. As a result lowering the interest rate leads to
financial crisis which in other way tantamount to an increment of demand for
money and amount of debt in circulation is at increase rate for the price of
goods and services at a high rate. Furthermore, people were not unable to pay
for every bit of their payment of debt they should pay.
Fifthly the US Government Pushes to Housing
and Mortgages, US government is among reason for the 2008 financial crisis due to their
policies changes by the and move to the mortgage& residential housing. In
regards to residential housing US government request the prices to increase for
the reason that people desire for the mortgage increase, as a result quit low
quality mortgage was supply for them at the market. Moreover, amount of money
in the circulation of their economy increase people, for that being the case,
people used anything in their possession just to have their own home and for
the mortgage lenders at large.
The lessons we learn from the 2008 global
financial crisis are as follows:
Firstly central bank need
to do something to control the liquidity bubbles and assets bubbles. It adversely
affect a particular society if they permit to build, comprising recessions with
property losses, attendant job losses and long term losses without growth or slow growth . Besides it’s very difficult
when the economy stimulus pressures are intense for supervisor to do job this
automatically lead to the financial crisis.
Secondly Assets Allocation
analysis, the perception that people in regarding risk is
that they always want to allocate their resource or assets to that of free
risk; which is difficult to see “knowing Allah (S.W.T) is in control. Besides
people should know, they need to put their resource in order to make the system
stable with management of this resource without exploitation
because it will lead to financial crisis. The state government must intercede in
case of exploitation of these resources, people pursue their own self-interest
in regards to their behavior in the direction of finance; private business
pursue their own future betterment, without considering the nation.
Thirdly diversifying
long term investment, what people
don’t perceived in diversifying their investment,
as wanting the instance return or benefit from their investment which in most event
lead to financial crisis. Besides the people have to invest their capital in
many businesses and make a long term investment in real assets its help the
capital growth and diversifying portfolios can also diminish financial crisis.
With the reason that without diversifying the business; when loss occur, the
only option for you will be taking of loans. Taking loans the debt will be
continue at an increasing rate and at end you will not be able to settle all of
debt rather be debt slave.
Fourthly have
lending partner not a lending facility, introduction of commercial
credit system to the societies can diminish financial crisis. Commercial credit
start with lending each other within ourselves instead of using bank lending
facility. Mutual credit or commercial crisis will not occur but financial
crisis occur because of mortgage and banks loans which is detrimental to us,
control us and make us slave because of debt. Furthermore lending within
ourselves not involve any of these, rather can conveniently use automatic
set-off if there is scarcity of physical cash , will diminish financial crisis.
In conclusion, as we learn that psychology play vital role in area of behavioral
finance and as which the people perceived it differently in regards to the
economy; as we pursue our self-interest and investment behaviors were in must
case run us down is one of the reason
lead us to the financial crisis. Furthermore I will encourage people to used
commercial credit which did not have any negative effect, less avoid taking of
loans from the bank.
Jazakallahu
khair WA Salam
Bibliography
Ludwig, E. A. (2008). Lessons Learned from the. The
William Taylor Memorial Lecture Series, 13-14.
Rimkus, R. (2006, August 17). The Financial
Crisis of 2008. Retrieved from The economic Crisises.Org:
http://www.economicrises.org/2016/17/the financial crisis-of-2008
Wlliam.c., D. (2017, November 06). Lessons from
Financial Crisis. Retrieved from Newyorkfed.org/ newsevents/speeches:
https://www.newyorkfed.org/newsevents/speeches/2017/dudd171106
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