Financial Crisis Essay
opinionated Essay
1076 words
Avery Howard
Econ 102 - Financial crisis paper
4-30-14
Causes and Results of the Financial Crisis.
The 2008 financial crisis started long before the market crash of 2008. After the Great Depression, America enjoyed a time of “Great Moderation”(economist) named for the consistently low interest rates and steady growth of the economy following the Great Depression. Financiers took note of this and eventually started to make more and more risky investment decisions; financial firm’s profits would increase as long as low interest rates and stable economic growth continued. Financiers eventually grew blind with greed. They “claimed to have found a way to banish risk when in fact they had simply lost track of it”(economist). The financial crisis was a result of poor government regulation, lax policies and the housing bubble burst that caused homeowners to default on their mortgages.
By irresponsibly lending mortgages to “subprime buyers” for the past three years, banks had created a potentially huge problem if homeowners started defaulting on their mortgages. Banks sold these mortgages, along with their risk of default, to bigger banks that pooled mortgages around America into one big investment. Pooling mortgages was designed to reduce the risk of an single individual defaulting on their mortgage. A majority of people were able to pay their mortgages back, only a small percentage would default, making pooled mortgages a profitable investment. Mortgages can only be pooled if their risks are interpreted as uncorrelated. Big banks claimed that the United States housing market is uncorrelated and housing values would fluctuate independent one another in different housing markets. Large banks went onto sell pooled mortgage debts to inve...
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...ght up to the banks when the housing bubble burst and people started defaulting on loans. The Federal Reserve needs to force banks to hold a minimum quantity of capital at all times. These regulations need to strictly define capital so banks can't “smuggle in forms of debt that did not have the same loss- absorbing capacity as equity” (economist). By placing strict regulations on the ratio of capital to assets a bank must hold, acknowledging that the United States housing market is not an uncorrelated market, and promoting strict oversight on financial institutions, there would be a more stable trustworthy system which would hopefully promote another period of low interest rates and high returns in America without the fear of the market potentially collapsing.
Reference List
"Crash Course." The Economist. The Economist Newspaper, 07 Sept. 2013. Web. 28 Apr. 2014.
In this essay, the author
- Explains that the 2008 financial crisis started long before the market crash of 2008.
- Explains that by lending mortgages to "subprime buyers," banks created a potentially huge problem if homeowners started defaulting on their mortgage.
- Explains that market consistency encourages investors to make risky higher yielding decisions in the long run, but if interest rates are low and unstable, investors will invest in long-term stable investments.
- Analyzes how the federal reserve's lax enforcement of laws and regulations on banks impacted banks' ability to make risky decisions.
- Explains that the 2008 financial crisis was caused by a series of failures by the government regulate united states financial institutions.
- Opines that the federal reserve should have bailed out lehman brothers before other banks would become subject to the same fate.
- Opines that the federal reserve's lax regulations were one of the biggest mistakes leading up to the 2008 market crash.
Related
- argumentative
- explanatory
- analytical
- comparative
- Financial Crisis Essayargumentative essayThe Financial Crisis of 2007-2009 According to the Federal Reserve Bank of Atlanta, the recession of 2007-2009 was the longest lasting one from after World War II. It persisted for 18 months, while on average a recession normally lasts approximately 10 months. The decline of employment has been much more lasting and brutal in contrast to the post-World War II recessions. Nearly four years after the recession started, the employment decline was still staggeringly high at 4.5 percentage points (Dwyer and Lothian).
In this essay, the author
- Explains that the recession of 2007-2009 was the longest lasting one from after world war ii, while on average a recession normally lasts approximately 10 months.
- Explains how financiers lost sight of risk, federal regulators and central bankers stood by and did nothing, and european banks purchased risky securities after borrowing excessively from money markets in america.
- Explains that federal regulators and central bankers made major mistakes before and during the crisis, such as allowing lehman brothers to go bankrupt.
- Explains how the federal reserve responded to the financial crisis by stabilizing financial markets, lowering interest rates on loans and mortgages, making regulation more stringent on mortgage lenders and credit card companies.
- Agrees with the policies the federal reserve and government have enacted to protect consumers from shady and unethical business practices.
- Argues that the government should let the banks fail, as it would hamper an economic recovery and have disastrous effects on investors and everyday people.
- Compares the financial crisis of 2008 and the 1987 crisis in terms of what caused them and how the government responded to them.
1460 wordsRead More - Subprime Crisis Essayexplanatory essayWhat Is Subprime Crisis Subprime crisis, also regularly known as the mortgage meltdown is a financial crisis that occurred between the years 2008 to 2009. It is a result of excessive borrowing to numerous homebuyers who have poor credit scores. This act of lending is called subprime lending. During this period, loads of homebuyers defaulted on their monthly payments as their interest rates increased with time. With that, there was a sharp upsurge in mortgage foreclosures.
In this essay, the author
- Explains that the subprime crisis, also known as the mortgage meltdown, was caused by excessive borrowing to numerous homebuyers who had poor credit scores.
- Explains that subprime lending is targeted at borrowers who don't meet the criteria or cannot afford the normal prime loans. these loans come with higher interest rates and are considered to have higher risks.
- Explains that the subprime crisis broke out when the housing bubble burst without parties realizing the possible occurrence of it.
- Explains that low interest rates kept monthly mortgage payments affordable for borrowers even when the housing price increases. subprime loans such as adjustable rate mortgages and interest only mortgages made it easier for the poor to buy houses.
- Explains that mortgage lenders/banks created mortgages from fixed deposits but it limited the funds that they could lend to the borrowers. they created investment products such as collateral debt obligation (cdo) and mortgage backed security (mbs).
- Explains that the community reinvestment act, which encourages financial institutions to meet the needs of communities, enforces the banks to extend their mortgage lending to lower income families.
- Explains the federal reserve's role in the subprime crisis.
1432 wordsRead More - Stock Market Crash Case Studyexplanatory essaySeveral things led to the 2008 Stock Market Crash, one being that there were the high subprime mortgages that were given. The Federal National Mortgage Association, better known as Fannie Mae began to focus on making home loans more accessible in 1999. By doing this, the borrowers are considered high-risk and their mortgages had unorthodox loan terms that caused higher rates and payments. This seemed to be a great idea in the beginning, but there were red flags. “Bob Prechter, founder of Elliot Wave International, consistently argued that the out-of-control mortgage market was a threat to the U.S. economy as the whole industry was dependent on ever-increasing property values.” (Kosakowski, 2008)
In this essay, the author
- Explains the factors that led to the 2008 stock market crash, such as the high subprime mortgages, and the rise of adjustable-rate loans.
- Explains that mortgage-backed securities (mbs) became popular with commercial investors and investors benefited from the premiums and interest payments that the individual mortgages contained.
- Explains that credit derivatives were designed to hedge against a company's creditworthiness, similar to insurance. the cds market was unregulated.
- Explains that the subprime lending market was in danger when bear stearns failed to underwrite a multitude of investments tools. homeowners were defaulting at high rates, owing more on their mortgages than their homes were worth.
- Explains that the dow jones industrial average (djia) reached a closing high of 14,164 on october 09, 2007 despite everything that happened.
- Describes how lehman brothers collapsed due to the collapse of the subprime mortgage market and filed bankruptcy. the dow closed at 10,917, down 499 points.
- Explains that lehman's collapse brought the value of the reserve primary fund to below one dollar per share in september 2008; investors were only allowed 97 cents. this caused an alarm in the money market fund industry.
- Explains that on september 18, 2008, talks of a government bailout began, sending the dow up 410 points and the following day treasury secretary henry paulson recommended that the troubled asset relief program (tarp) be accessible.
- Explains that citigroup bought wachovia's assets in a $2.2 billion all-stock deal, while jpmorgan chase bought washington mutual. goldman sachs, merrill lynch, and bank of america suffered as well.
- Explains that 2008 was the worst year for the standard & poor's 500 since 1937, and the dow jones industrials dropped 33.8%, making 2008 the nastiest annual decline ever experienced by most current investors.
1191 wordsRead More - Causes for the 2007 Recessionanalytical essayBased on this case study, it is clear that a plethora of reasons surrounding the U.S housing market led to the financial crisis, and consequently, the Great Recession of 2007. Most notable among the factors were subprime mortgage lending by mortgage lenders, poor risk management and investment choices by financial institutions and banks, and the ancillary agencies that were ready to transfer credit risk to other parties in order to make the most profit for themselves.
In this essay, the author
- Explains that the trend of lax mortgage processes and risky loan applications caused house prices to shoot up to an all-time high by the year 2006. the danger of adjustable rate mortgages became obvious to buyers when their teaser period expired.
- Explains that more and more houses ending up in foreclosure led to huge losses for the financial institutions, with recovery rates as low as 25% of the amount.
- Explains the concept of asset-backed securities, which became rampant during the housing bubble.
- Explains that the great recession was attributed to the burst of the u.s. housing bubble and the subprime mortgage crisis.
- Analyzes how lax standards on the part of lending organizations led to the financial crisis and the great recession.
1027 wordsRead More - The Great Recessionanalytical essayIt can be argued that the economic hardships of the great recession began when interest rates were lowered by the Federal Reserve. This caused a bubble in the housing market. Housing prices plummeted, home prices plummeted, then thousands of borrowers could no longer afford to pay on their loans (Koba, 2011). 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.
In this essay, the author
- Explains that every few years, countries experience an economic decline which is commonly referred to as a recession. the paper will cover the issues which led to the recession, discuss the strategies taken by the government and federal reserve to alleviate the crisis, and look at the future outlook of the u.s.
- Argues that the economic hardships of the great recession began when interest rates were lowered by the federal reserve. the bubble forced banks to give out homes loans with unreasonably high risk rates.
- Explains how the federal reserve stepped in and bailed out the banks in an attempt to smooth over the financial struggles of the economy.
- Analyzes how the u.s. government and federal reserve stabilized the economy and prevented a second great depression, but left tens of millions of americans out of work, under-employed or earning significantly less.
- Analyzes how the nation's economic struggles during the great recession led to the current macroeconomic situation that deals with unemployment.
- Cites mcgraw-hill/irvin koba (2012) and love, n. s., & mattern, m.
670 wordsRead More - The Housing Boomexplanatory essayIn the early 2000’s the housing market boomed, real estate was a hot investment and everyone was looking to buy a home. However not everyone can afford a home and a majority of people were forced to take out a mortgage to purchase real estate. During the housing boom banks were supplying subprime loans and upping the risk in the real estate market. These loans were not only risky but irresponsible on the part of the banks’ lending them, and although individuals receiving the loans thought they were being helped at the time, these loans were a major reason why so many people their homes, almost crippling toe U.S economy as a whole.
In this essay, the author
- Explains that during the housing boom, banks were supplying subprime loans and upping the risk in the real estate market. these loans were risky and irresponsible.
- Explains how the real estate market and mortgages banks issue is an investment. prime borrowers were able to borrow money at a stable, fairly low interest rate.
- Explains that the banks' lending these subprime loans knew the risk that went along with each loan and each borrower. they packaged loans up and sold them to large investment firms as mortgage backed securities.
- Opines that the housing crisis shows that everyone takes a risk when it comes to investing and everyone may pay the consequences of risking too much.
- Explains that the 600 billion dollar subprime loan market crashed, and the risk banks took by lending these loans did not pay off.
674 wordsRead More - Solving the Foreclosure Crisisanalytical essayThe subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. The collapse of the US housing market has had a devastating effect on the nation, where the housing price boom was particularly pronounced, and the subsequent decline has been particularly disastrous. Hundreds of thousands of working and middle class citizens are in danger of losing their homes. The U.S. Home Loan Bank Act launched the government into a long-range program to reform and strengthen the savings and loan institutions. The Home Owners Loan Act provided emergency relief to homeowners and to mortgage-lending institutions. Neither of these measures had been effective, however, in providing an adequate stimulus to residential construction. Nor had they provided a means for encouraging the flow of loans into residential building from other classes of lending institutions. In 1934, the administration and Congress turned their attention to the problem of stimulating employment in residential construction. The National Housing Act of 1934 authorized the establishment of a system of mortgage insurance under the Federal Housing Administration. To achieve its objective of stimulating employment, Federal insurance was authorized of short-term loans for home repair and improvement. This insurance was offered free on any loan made by any qualified lending institution for any hom...
In this essay, the author
- Explains that the subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the united states.
- Explains that title ii of the u.s. home loan bank act authorized the establishment of an insurance fund for mortgages on homes built under federal supervision or purchased after federal appraisal.
- Explains that the insured mortgage was admirably suited to the needs of national mortgage lenders, including life insurance companies, commercial banks, and savings banks
- Argues that a combination of financing incentives will encourage cost reductions on the part of house and apartment builders.
- Explains that a subsidized interest rate is another alternative to financing housing for middle-income families.
- Explains that president barack obama and key advisers introduced a series of regulatory proposals in june 2009. the proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the federal reserve to safely wind-down systemically important institutions.
- Explains that amortization reduces the debt's sensitivity to interest rate risk, as compared to debt with the same maturity and coupon rate.
1783 wordsRead More - U.S. Economic Crisisexplanatory essayThe relationship between mortgages, the housing crisis and Wall Street were the excess capital globally pushed an enormous amount of money into the U.S mortgage market, so then the idea of generating higher returns originated. Mortgages were now offered at a high mortgage rate to borrowers. The decline in housing prices led to rising defaults among subprime and ALT A borrowers, borrowers with adjustable –rate mortgages, and borrowers who had made only small down payments, many investors on Wall Street refused to buy mortgages backed securities that led to this financial crisis. As an example large financial firms, including Bear Stearns, Merrill ...
In this essay, the author
- Explains that the united states is currently experiencing the biggest financial crisis after the great depression. they will discuss the relationship between mortgages, the housing crisis and wall street.
- Explains that the current economic crisis started from the real estate market, focusing on subprime mortgages and lenders that loaned money to high risk borrowers.
- Explains the relationship between mortgages, the housing crisis and wall street. the decline in housing prices led to rising defaults among subprime and alt a borrowers.
- Explains that fiscal policy is the government expenditure and revenue collection to influence the economy before the current economic crisis.
- Explains that the economy of the united states is the world's largest and its gdp is comprised of consumption, investment, government spending and net export.
- Explains the different types of unemployment, including frictional, structural, demand-deficient, cyclical, and seasonal. unemployed works have no job, while underemployment involves underutilization of a working individual's skills.
- Opines that the economy is at its worst since the great depression and the government needs to make drastic cuts with spending and stop importing cheaper goods.
871 wordsRead More - Financial Crisisanalytical essayThe Impact of a threat of a credit default. The financial crisis 0f 2007-2008 is widely considered to be the worst financial crisis since the great depression. The effects of the financial crisis were cataclysmic it resulted in companies going under, others getting bailed out by the government and the stock market taking a nose-dive which led to a domino effect of recessions and bail outs around the world.
In this essay, the author
- Explains that credit derivatives shift credit risk from one borrower to another debt holder or corporation. they are tied to a reference entity or reference obligor.
- Explains the concept of cdos in the 1980's by a bank called salomon brother by securitizing the loans and converting them to bonds.
- Explains that the housing market was coming down but inflation was going up and the u.s. central banks tried to combat the rising inflation by increasing interest rates.
- Explains that cdo traders operate separately from the bank and their job is to make sure the credit quality of the securities doesn't change.
- Analyzes how the 2008 financial crisis punched the banking sector right in the gut, causing banks to harvest huge losses.
- Explains how aig was hit the hardest by the financial crisis. it had to pay out insurance claims and restore its collateral losses.
- Analyzes how the feds and the treasury department have loaned out more money to aig, sending shock and panic throughout the world that the biggest insurer needed to be rescued.
- Explains that the government owned aig's role in the financial crisis. other banks like fannie mae and freddie mac were rescued by a federal takeover.
- Explains that the increase in riskier loans and mortgage backed securities was inspired by the amplified earnings that were achieved from a unique refinancing boom.
- Compares ginne mae to freddie mac and fannie mae, which is under full ownership of the department of housing and development.
- Analyzes how the treasury department and the federal reserve took action to inspire confidence in the government sponsored agencies.
- Explains that fannie mae and freddie mac were the foundation of the housing market that was collapsing.
- Explains that the treasury's order to give funds for keeping fannie mae and freddie mac afloat was limited to the sum of debt that government can give by law.
- Explains that the financial crisis of 2007-2008 was cataclysmic and was motivated by the subprime mortgage crisis.
3254 wordsRead More - Systemic Crisis Essaycomparative essayA systemic crisis is a crisis in which the breadth of impact reaches many individuals within the system; for example, schools, businesses, entire communities, regions, or it may be worldwide. The individuals involved in a systemic crisis can become overwhelmed with the enormity of the situation and need physical and/or psychological assistance to regain control. Systemic crisis interventions require a combination of strategies working cooperatively together across multiple agencies to effectively address all potential needs of the victims. However, not all systemic crises are the same and require interventions that are specific to the systemic crisis category. The following paragraphs will give a brief description of a natural disaster
In this essay, the author
- Explains that a systemic crisis is one in which the breadth of impact reaches many individuals within the system.
- Explains that winter storms are different from a snowy day in that they can include heavy snow, damage-causing ice, high winds, dangerously low temperatures, low visibility, among various personal crises.
- Explains the zika virus, a worldwide public health crisis, which is primarily transmitted through the bite of an infected mosquito.
- Recommends preparing for the inevitable and protecting yourself before, during, and after a winter storm.
- Explains that the cdc is working with local, national, and international partners to monitor and coordinate the emergency response to the worldwide zika outbreak.
- Explains how they became overwhelmed with the enormity of natural disasters and public health crises. they conclude that not only victims need support during a systemic crisis.
- Explains that a systemic crisis requires multi-/interdisciplinary approach, multiple theories are utilized, coordination and collaboration are essential, and individuals' physical and/or psychological needs should not be forgotten in the rush to regain control of the system.
1214 wordsRead More