Global Financial Crisis: Lessons Learned

Abstract

A financial crisis appears to occur in a certain pattern; it usually starts with a rally of bank credits against a backdrop of easier monetary policy, ample liquidity, and more relaxed banking regulations. Such financial environment stimulates excess leverage to fund assets in real estates and housing in which consumers take advantage of cheap money and borrow heavily, while bankers zealously lend out in order to achieve high loan growth targets. As with all levered instruments, this practice generates great profits when the asset value rises. In contrast, it produces great losses when the assets fall in value, forcing lenders to ration credits and to compete aggressively for funds to cover the resultant losses. Retrospectively, the Global Financial Crisis exhibits far reaching implications from the excessive leverage, deregulation and from the spiral effects of globalisation, financial speculation, product innovation, moral hazards, and incentives problems. This paper reflects how similar or different the Global Financial Crisis is from the past crises in terms of its causes and manifestations, how Malaysia was impacted, and what key lessons could be learned from it.   Keywords: Financial crisis; risk taking and banking.