2008 Financial Crisis Essay

The 2008 financial crisis left much of the United States’ economy in shambles and the debate still continues as to what in particular led to the collapse. In reality, it was a combination of all the factors mentioned above that contributed to the economic meltdown of 2008. To prevent it again would require greater regulation and a decrease in liberal economic policies. However, that is easier to say than to practice in an era dominated by liberal policies. Another financial crisis will occur; however, it will depend on US policymakers and other actors in the financial and economic sectors to determine the extremity of the crisis.

Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident.

The actions of mortgage lenders in the mid-2000s led to the most economically devastating financial crisis since the Great Depression. We believe mortgage lenders should shoulder much of the responsibility for creating such a crisis. The lenders took several specific unethical actions, which will be defined in this report. First, the lenders failed to act in good faith. Conflicts of interest were created when they sold pre-packaged mortgages as securities to investment banks at a profit.

The problems arrived over a period of time from 1995 to 2008. The first and main problems that lead to the economic collapse was sub prime mortgages. Sub prime mortgage is a certain kind of loan granted to people with poor credit histories, who which wouldn’t usually be qualified for conventional mortgages (Investopedia). These sup prime mortgages would backfire on banks across the nation resulting in huge financial loses. According to USA Today, “Housing crisis deepens.

The bubble forced banks to give out homes loans with unreasonably high risk rates. The response of the banks caused a decline in the amount of houses purchased and “a crisis involving mortgage loans and the financial securities built on them” (McConnell, 2012 p.479). The effect on the economy was catastrophic and caused a “pandemic” of foreclosures that effected tens of thousands home owners across the U.S. (Scaliger, 2013). The debt burden eventually became unsustainable and the U.S. crisis deepened as the long-term effect on bank loans would affect not only the housing market, but also the job market. 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.

The History According to Arnold (2009, p.803-809), subprime mortgage defaults in the United States was the first problem in this current financial crisis, then bubbled damaging cris... ... middle of paper ... ...tion. Firstly, the Fair Value Accounting is not always accurate in the financial market because the value of assets and liabilities always fluctuated. Sometimes, the asset value is overestimate and underestimates. Secondly, the Fair Value Accounting makes financial institution reduce their ability to face the risk because in this current economic situation the value assets are fluctuated. It is a problem to managers to sell or buy the assets.

Presently in the United States millions of homeowners are facing the prospect of losing their homes due to bank foreclosure. An event if allowed to occur has the potential of collapsing not only our financial system, but our social fabric as a nation. The unfolding crisis has prompted the US Government to enact aggressive monetary stimulus designed to reverse the downward spiral of home values. Unfortunately this approach has failed to achieve any meaningful results and perhaps has acted more as a red herring to conceal the real issues causing this debt implosion. With billions of dollars being pumped into the banking system why then are banks still timid to continue financing home loans?

Since the year 2008, many countries had been suffered from a financial crisis or Hamburger crisis, because of the mistaken policy, complex financial system etc. which cause a severe shock to the financial system globally. From this impact, the federal government of United State of America (USA) and other countries had injected a large fund for retrieving this situation significantly. Therefore, it can be explained that understanding the main causes of the financial issue can assist each country to clarify problems. The purpose of this essay is to elucidate regulatory failure in 3 major types: first, misguided intervention in the U.S. second, failure of financial risk management, next, the lack of transparency regulation in private and public sector, and a case study from Lehman Brothers.

The Financial Crisis of 2008 was the worst financial crisis since the Great Depression, however a lot of American’s want tougher law of be enforced against executives and companies they think started the mess (Jost/Misconduct). Civil charges have been brought up against major banks for misleading investors, but a federal judge rejected a proposed settlement saying it was too lenient (Jost/Misconduct). The flood of subprime mortgages roiling the housing market in the U.S. is also causing the worldwide credit crisis (Jost/Crisis). Investment banks everywhere are taking billion-dollar losses, forcing them to revalue their belongings (Jost/crisis). This crisis started under the surface for many years then emerged into the public in March 2008 when cash-strapped Bears Steams were being forced to sale to JP Morgan Chase; they did this for a worthless $2 a share (Jost/Misconduct).

The prices then started to go down and the big financial institutes which were the major investors in subprime MBS lost heavily. In result of this the home prices started decreasing rapidly and it caused foreclosures. The foreclosure issue began in late 2006 in the U.S. and continued to drain wealth from consumers and the banking institutions. It affected the other loan types and default on those loans increased enormously and the crisis got bigger and started to affect other parts of the economy. The basic cause of the financial crises falls collectively on debt and mortgage-backed assets.