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Research the Causes of financial crisis in 2008 & 2011 and compare those with classical and Keynesian approaches.

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Introduction

PART 1 Future of finance With the current situation predicting future of finance is a tough topic even though based on statics come across some conclusive findings. The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. Achieving greater risk mitigation through macroeconomic and financial policies; and exploring more effective cross border linkages as a key dimension of a more prosperous future more risk-averse policy. Research suggests that economic growth will suffer from a sinking feeling among consumers that their incomes will continue to lose ground to inflation. Even though households are digging themselves out of debt, the painful 2007-2009 recession could leave a lasting scar on their willingness to spend. Many borrowers have been helped by the Federal Reserve's push to lower interest rates. Others are simply walking away from mortgages. People (need) to really believe that sustained strong growth is coming, which is like solving a problem by presuming its solution. ...read more.

Middle

* Bounded rationality to government and foreseeing financial institutions. PART2 Causes of financial crisis in 2008 & 2011 and compare those with classical and Keynesian approaches * The media spread the news rapidly, resulting in a sudden decline in confidence from investors, and less capital flow. Investors' sensitivity to shock and panic resulted in a sudden decrease in liquidity, which firms heavily relied on. The failure of one firm offset the risk of contagion, and led to failures of many other firms. Many firms held securities containing highly positively correlated risks, and failed to diversify their portfolio to decrease risk. Counties with large trade surplus with the US, such as China, preferred safe investments. They bought huge amounts of treasure bonds, and pushed rate of yield down. As a result, foreign investors started to invest in mortgage market related securities. This huge amount of foreign investment gave US mortgage firms more money to lend out; thus, raising the price of housing the decrease of liquidity due to the decrease of short term debts The US went further on financial innovation. ...read more.

Conclusion

European Debt market 2012, Predictions Nothing is certain about the debt market. Only predictions: * Market points out that many countries have big debts to repay, but demand from consumers for goods and services are weak. * Probably France's AAA rating will downgraded. More costly the finance will be. Chance of public protest to exit from euro currency. Leaders could resign or removed. Many countries find difficulties in securing the funding of national budgets and moreover Crisis continues. Euro survives. . Network theory of systemic risk is a tool to find the possibility that a triggering event such as a bank failure or a market disruption could cause widespread disruption of the ?nancial system; the functioning of the global ?nancial system has been challenged by an extraordinary sequence of such triggering events. Network theory can help us to analyse the systemic risk of such disruptions (i) by looking at how resilient the system is to contagion; and (ii) what the major triggers and channels of contagion are.it is necessary to construct risk-based balance sheets. Even though the theory say so it is very difficult to do so because of vast size of EU and different governments in different countries'. ...read more.

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