The financial crisis in 2008 that led to a crisis in the banking sector, and which nearly led to a complete collapse of the economy globally, was not only caused by changes in the regulatory, regulation and legislation oversight, but also fiscal and monetary policies. Many believe that, expansion of excesses monetary and irresponsibility of some of the government agencies led to the crisis. According to reports by Taylor (2009), excesses monetary policies were the main cause of the 2008 financial crisis. He reports that, in 2003-2005 the federal reserves held its interest rate target below the well known monetary rules that state that historical experiences should be the base of a good policy. He says that, Federal Reserve tracked their rates according to what worked better in the earlier decades, instead of lowering the rates in order to prevent the crisis. Taylor supports his claims with evidence given by researchers from the Organization for Economic Cooperation that was corrected from other countries showing that the higher the monetary excess the larger the boom in the housing sector. The crisis was worsened by other factors which included adjustable-rate mortgages and subprime use; this led to excessive taking of risk. Evidence shows that, excessively low rates led to the excessive taking of risk. Housing inflation were inversely related to both foreclosure and delinquency rates. The rates dropped drastically over the years which led to increased house prices that almost collapsed the mortgage programs. As a result of the crisis in subprime mortgages, the Troubled Asset Relief Program (TARP) program was introduced in the beginning of October 2008 by the United State government that enabled the purchase of equity and as... ... middle of paper ... ...s that had surpluses back to the country. Works Cited Kaminsky, G., & Reinhart, C. (1999). The Twin Crises: The Causes of Banking and Balance of Payment Problems, American Economic Review, 89, (3), 473–500. Killoren, G.D. (2009). How Government Economic Policies Caused the Financial Crisis of 2008. Retrieved from http://rawfinanceblog.com/2009/07/23/how-lax-u-s-monetary-policy-contributed-to-the-financial-crisis Lothian, J.R. (2009). U.S. Monetary Policy and the Financial Crisis. Journal of Economic Asymmetries,6 (2), 25-40. Mankiw, N.G. (2010). Questions about Fiscal Policy:Implications from the Financial Crisis of 2008-2009. Federal Reserve Bank of St. Louis Review, 92, (3), 177-184. Taylor, J.B. (2009). How Government Created the Financial Crisis. Wall Street Journal. Retrieved from http://online.wsj.com/article/SB123414310280561945.html
Curry & Shibut (2000), The Cost of the Savings and Loan Crisis: Truth and Consequence .Retrieved July 20, 2010 from www.fdic.gov/bank/analytical/banking/2000dec.
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.
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. We didn't get unlucky. The crisis came because there have been a lot of bad practices and a lot of bad ideas". The 2007 financial crisis was composed of the fall of many major financial institutions, an unknown increase in mortgage loan defaults, and the derived freezing up of credit availability (Brue). It was the result from risky mortgage loans and falling estate values (Brue) . Additionally, the financial crisis of 2007 was the result of underestimation of risk by faulty insurance securities made to protect holders of mortgage-back securities from risk of default and holders of mortgage-backed securities (Brue). Even to present day, America stills suffers from the aftermaths of the financial crisis.
Metzler, Allan H. A History of the Federal Reserve, Vol I and II. University Press Books, 2002
It 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.
Florida, R. (2009). Passing the Buck-Economy in Crisis?. In g. Goshgarian & K. Krueger (2011),
U.S Federal Deficit and Debts:Understanding the history and context. (2011, November 1). Utah Foundation. Retrieved January 25, 2014, from http://www.utahfoundation.org/img/pdfs/rr7
The monetary policies that caused the financial crisis were that the Federal bank reserves provided banks with new funds that enabled them to make loans and investments. The process led to increase in money supply which in due course increased the rate of spending (Flores, Leigh & Clements, 2009). Eventually, the increase in spending over and beyond the capacity the economy to produce goods and services led to inflation.
This essay will examine the causes of the 2008 Global Financial Crisis (GFC) from a Marxist perspective. This paper will specifically examine and critique how Marx’s Theory of Crisis can be applied to understand and interpret the underlying structural causes of the 2008 Global Financial Crisis.
The first main cause of the Two-Thousand-Eight financial crisis was the eruption in the housing sector in the United States that spiked in the years of Two-Thousand Five and Six. Because of this, there were high cases of defaults on adjustable and subprime mortgage rates. Therefore, banks
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.
The subprime mortgage crisis is an ongoing event that is affecting buyers who purchased homes in the early 2000s. The term subprime mortgage refers to the many home loans taken out during a housing bubble occurring on the US coast, from 2000-2005. Home loans were given at a subprime rate, and have now led to extensive foreclosures on home loans, and people having to leave their homes because they can not afford the payments. The cause and effect of this crisis can be broken down into five major reasons. When subprime mortgages began to flourish, the term housing bubble came into existence.
The Social Studies Help Center (n.d.). Monetary and Fiscal Policy. Retrieved November 5, 2011, from http://www.socialstudieshelp.com/eco_mon_and_fiscal.htm
Warwick J. McKibbin, and Andrew Stoeckel. “The Global Financial Crisis: Causes and Consequences.” Lowy Institute for International Policy 2.09 (2009): 1. PDF file.