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Background of 2008 financial crisis
Background of the 2007-2008 financial crisis
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The US Financial System: A Crumbling Empire The financial system has been crucial to the role of free enterprise. “Financial markets have come to supply non-financial corporations with mechanisms for managing their risks and for comparing and evaluating diverse investment opportunities in a highly complex global economy” (Cindin, 2008). “However, despite the lifetimes it took to build our financial institutions, bad luck and careless risk management have jeopardized careers and mortgaged these institutions’ futures”(Wallace, 2008). The nation is currently attempting to deal with the biggest financial crisis since the Great Depression. It is now imperative that a way be found which will re-regulate finance without undermining finance’s needed innovative capacity. The origin of the financial crisis can be dated back to 2006. During that period in time, companies began buying trillions of dollars of complex financial products called ‘structured credit derivatives’. The value of these derivatives quickly escalated to over one-hundred trillion dollars due to the high demand from banks around the world. “These paper investments were supposedly backed by loans on houses, cars, businesses, and credit cards” (Francis, 2008). Nevertheless, several issues have erupted from the sale of these paper investments. The production and trading method for derivatives is unclear, and no one really knows what credit risk is transferred to whom. Basically, banks were fighting over assets with questionable values. Even though the sale of derivatives has disrupted our economy, it is not the primary reason for which the financial system is now in distress. The reckless selling of mortgage loans has lead to the eventual breakdown of our financial... ... middle of paper ... ..., Jane & Francis, Theo. The Financial System Bailout: Deal or No Deal? (2008). Business Week. Retrieved November 2, 2008, from http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080925_596844.htm Solomon, Deborah & Crittenden, Michael & Paletta, Damian. US Bailout Plan Calms Markets, But Struggle Looms Over Details (2008). Wall Street Journal. Retrieved November 2, 2008, from http://online.wsj.com/article/SB122191819568460053.html?mod=googlenews_wsj Stewart, Heather. IMF Says US Crisis is Largest Financial Shock Since Great Depression (2008). Guardian News. Retrieved November 2, 2008, from http://www.guardian.co.uk/business/2008/apr/09/useconomy.subprimecrisis Wallace, Michael. Wall Street Talks: What the Bailout Means (2008). BusinessWeek. Retrieved November 2, 2008, from http://www.businessweek.com/investor/content/sep2008/pi20080922_128934.htm
Just as the great depression, a booming economy had been experienced before the global financial crisis. The economy was growing at a faster rtae bwteen 2001 and 2007 than in any other period in the last 30 years (wade 2008 p23). An vast amount of subprime mortgages were the backbone to the financial collapse, among several other underlying issues. As with the great depression, there would be a number of factors that caused such a devastating economic
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Vlasic, Bill. "U.S. Ends Bailout of G.M., Selling Last Shares of Stock." The New York Times [New York City] 9 Dec. 2013: n. pag. Print.
The year 2008 was a very scary one for anyone involved in the US stock market. Due to subprime lending, and cheap mortgages, the housing market became grossly overinflated. Naturally, as with a balloon that’s filled too much, it “popped”. The resulting collapse of the housing bubble had severe implications for the rest of the US economy, housing, and related industries such as lumber, construction, and realty all came crashing down, and the people employed in those fields soon found themselves out of work. As with the stock market crash of 1929, fear of the economic instability caused people to pull their money out of any investments they had. This can be a problem for a healthy bank, being unable to supply the money people are requesting if it’s tied up in loans. However, this would prove to be an even bigger problem if the money never existed in the first place, and would take down one of the largest scams in American history.
Jake Clawson Ethical Communication Assignment 2/13/2014. JPMorgan Chase, Bailouts, and Ethics “Too big to fail” is a theory that suggests some financial institutions are so large and so powerful that their failure would be disastrous to the local and global economy, and therefore must be assisted by the government when struggles arise. Supporters of this idea argue that there are some institutions that are so important that they should be the recipients of beneficial financial and economic policies from government. On the other hand, opponents express that one of the main problems that may arise is moral hazard, where a firm that receives gains from these advantageous policies will seek to profit by it, purposely taking positions that are high-risk, high-return, because they are able to leverage these risks based on their given policy. Critics see the theory as counter-productive, and that banks and financial institutions should be left to fail if their risk management is not effective.
A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho...
The Dodd-Frank Wall Street Reform and Consumer Protection Act’s policies haven’t really been implemented to the extent that regulators would have liked. Although the legislation takes many steps in addressing systematic risks in the United States financial system and improving coordination among regulators, some critics believe that alternative options might have been more effective. The coming years will give us a better understanding of how well the Dodd-Frank Act addressed these concerns.
Waggoner, John. "Is Today's Economic Crisis Another Great Depression?" USA Today. N.p., 4 Nov. 2008. Web. 7 Mar. 2014.
What at first seemed to be an economic slump turned into a brutal crisis, and all eyes looked to the Government and Federal Reserve to help the economy. With the large amount of debt the economy faced the Federal Reserve stepped in and bailed out the banks in an attempt to smooth over the financial struggles of the economy. The banks that survived took precautionary measures, making it difficult for businesses and consumers to borrow (Love, 2011). Thus leading to businesses failing and less jobs being created. The large amount of debt had also taken its toll on the job market. Between 2007 and 2009 employment dropped by 8 million workers, causing the unemployment rate to go from 4.7 percent to 10 percent (McConnell, 2012).
Between January 2008 and February 2010, employment fell by 8.8 million, the largest decline in American history. The 2008 Recession, which officially lasted from December 2007 to June 2009, began with the bursting of an 8 trillion dollar housing bubble. Job losses during the recession meant that family incomes dropped, poverty rose, and people all over the country were suffering. Things like this don’t just happen. Policy changes incorporated with the economy are often a major factor. In this case, all roads lead to one major problem: Deregulation. Deregulation originating from the Carter and Regan Administrations, combined with a decrease in consumer spending, and the subprime mortgage bubble all led up to the major recession of 2008.
The "subprime crises" was one of the most significant financial events since the Great Depression and definitely left a mark upon the country as we remain upon a steady path towards recovering fully. The financial crisis of 2008, became a defining moment within the infrastructure of the US financial system and its need for restructuring. One of the main moments that alerted the global economy of our declining state was the bankruptcy of Lehman Brothers on Sunday, September 14, 2008 and after this the economy began spreading as companies and individuals were struggling to find a way around this crisis. (Murphy, 2008) The US banking sector was first hit with a crisis amongst liquidity and declining world stock markets as well. The subprime mortgage crisis was characterized by a decrease within the housing market due to excessive individuals and corporate debt along with risky lending and borrowing practices. Over time, the market apparently began displaying more weaknesses as the global financial system was being affected. With this being said, this brings into question about who is actually to assume blame for this financial fiasco. It is extremely hard to just assign blame to one individual party as there were many different factors at work here. This paper will analyze how the stakeholders created a financial disaster and did nothing to prevent it as the credit rating agencies created an amount of turmoil due to their unethical decisions and costly mistakes.
In previous years the big financial institutions that are “too big to fail” have come to realize that they can “cheat” the system and make big money on it by making poor decisions and knowing that they will be bailed out without having any responsibly for their actions. And when they do it they also escape jail time for such action because of the fear that if a criminal case was filed against any one of the so called “too big to fail” financial institutions it...
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
In conclusion, we feel that the recommendation we have suggested in this report is a suitable foundation to build a sustainable and prudent financial system in this country. This will facilitate the financial industry both, withdraw out of this crisis and in the future avoid as much as possible inducing the scale of matters at present. As the report suggest, everyone contributed in their own miniscule way to this crisis, we feel that it’s up to every one of us to contribute to the overall recovery of this financial crises and recovery of the nation in general.
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.