Understanding Global Financial Crisis Through System Dynamics

Dr. Sambasivam Srinivasan, Sriram Srinivasan

ABSTRACT

Starting from the summer of 2007 first at USA, followed by European and Asian markets we witnessed a global financial crisis. As we are slowly recovering from the crisis, as of now, several economies are in painful process of slow recovery. We are nowhere near to the pre crisis state. Some experts [1] have blamed repeal of Glass-Steagall act which allowed the commercial banks to more risky areas and in general deregulation policies. Some attributed to the derivatives and Structured Investment vehicles that were designed and sold by Financial Engineers which was not understood by ordinary investors. Robert C.Merton attributes that non linear derivatives not fully understood by ordinary focks as well as regulators and compares the situation to that of going for increased speed of engine without tracks to support such a high speed train – lack of infrastructure [5].

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