When the housing bubble burst the Fed responded by providing large amounts of liquidity to the economy to help soften the blow in the short term. Then the Fed lowered and lowered interest rates to encourage more investors to invest. Despite the Federal Reserve’s best efforts very large financial institutions began to experience some pretty significant trouble and the government had to step in and bail them out (Bailout Recipients, 2014). JP Morgan Chase, Citibank, Bank of America, and Lehman Bros. to name just a few were referred to as “too big to fail.” The nation barely escaped a cataclysmic financial crisis by stepping in to save the banks. As bad as the great recession was, it could have been so much worse.
The collapse of the property bubble and uncertainty in the markets led to a run by depositors and a sudden loss of funding for banks day to day activities. Due to the dependence of the interbank lending market for short term funding, these banks were unable to fund their day to day operations and some collapses, (Lehman Brothers) while others were bailed out by the US government (AIG). Such a loss of confidence within the financial industry eventually led to banks operating a more cautious approach to lending and ensured a severe reduction in the availability of credit, both to other banks and consumers. I will look at the how subprime lending, assisted by expansionary macroeconomic policies and lenient regulatory supervision, eventually morphed into a full financial crisis rather than the view that such crises are cyclical in open market economies and are part of the boom and bust characteristics of capitalism. Sub-prime Mortgages and the Building Blocks of the Financial Crisis ... ... middle of paper ... ...pubs/ft/fandd/2008/06/dodd.htm Carmassi, J, Gros, P and Micossi, S. The Global Financial Crisis: Causes and Cures.
Banks have investors they need to please; they have annual reports to publish to the public. They are pressured just like every other public traded company to produce good results to satisfy investors. They have to cover their losses somehow and maintain a reputable image. All of the faulty loans issued in 2006 with high interest rates produced a quick profit, at the borrowers expense. Their income reports were off the charts as they were approving loans left and right.
Retrieved from Forbes: http://www.forbes.com/sites/brettnelson/2011/09/08/16-ways-911-changed-the-way-we-do-business/ New, C. (2011, September 11). Then and Now: How the Economy has changed since 9/11. Retrieved from Daily Finance: http://www.dailyfinance.com/2011/09/11/then-and-now-how-the-economy-has-changed-since-9-11/ Staff, H. (2010). 9/11 Attacks. Retrieved from History.com: http://www.history.com/topics/9-11-attacks Welch, P. J.
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When fair value accounting was first brought in by the International Accounting Standards Boards a few years ago, there were some concerns about the volatility it would bring, but in an optimistic economy it made company figures look good and the matter was left alone. However with a credit crunch in full swing, the matter has again been brought up as figures fall dramatically. Companies, regulators and politicians are all attacking the accountancy profession and accountants are taking the flak for banks making huge write downs in their books. Should companies simply ride out their current financial crisis or should the accountancy profession take some responsibility for assisting economic recovery as it was due to their poor financial reporting regulations that contributed to the credit crunch? The financial crisis otherwise known as the ‘credit crunch’ of 2007 to the present was triggered by a liquidity shortfall in the US banking system.
Over speculation is another main factor in the collapse of the stock exchange therefore it cannot be said that the governments laissez-fair attitude is solely to blame. There are many other factors which add to the over speculation and cause the collapse. Some banks chose to buy stocks u... ... middle of paper ... ...ernment could have prevented the collapse of the stock exchange but they were unable to because they did not act soon enough due to their laissez-fair attitude. The collapse of the stock exchange was due to many factors that built up and originated during the roaring twenties. There was a lot of over speculations which lead to a lot of people taking out loans and not being able to pay back, including banks that used up the money that had been deposited to them.
"Financial Reform: Unfinished Business”, New York Review of Books, Retrieved December 28, 2013 from http://www.nybooks.com/articles/archives/2011/nov/24/financial-reform-unfinished-business/ Working, Holbrook (1960). “Note on the Correlation of First Differences of Averages in a Random Chain”, Econometrica, 28, pp. 916-918. Quiggin, John (2013). "The Bitcoin Bubble and a Bad Hypothesis", The National Interest, Retrieved December 27, 2013 from http://nationalinterest.org/commentary/the-bitcoin-bubble-bad-hypothesis-8353
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