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The Credit Crisis of the Century

analytical Essay
1459 words
1459 words
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The financial crisis of 2007 should be referred to as the credit crisis of the century. Despite what many Americans may believe, the financial crisis was a worldwide fiasco that affected everyone. There is no one to particularly blame for the financial crisis of 2007, but the understanding of subprime mortgages, collateralized debt obligations, credit default swipes, and frozen markets can explain the economic devastation that is still felt today. The financial crisis of 2007 is a huge cycle. It began by brining two groups of people together that had no prior direct relationship history. These two groups of people are homeowners and investors. During the explanation of how the financial crisis occurred, allow homeowners to represent mortgages and investors to represent money. These mortgages in turn represent houses and the money represents large institutions such as pension funds, mutual funds, sovereign funds, and insurance companies. These groups are brought together through the financial system, which consist of a variety of investment banks and brokers commonly referred to as Wall Street. Though it may not seem like it, the banks on Wall Street are closely connected to the houses on Main St. Before the financial crisis of 2007, the economy had been doing well. Investors had a plentiful of money and were looking for opportunities to invest. Traditionally these investors would go to the Federal Reserve in which they could buy treasury bills. Treasury bills were believed to be the safest investment at the time. However, in response to tragic events of September 11th 2001, Federal Reserve chairman, Allen Greenspan lowered interest rates to one percent. His intentions were to keep the economy strong during times of turmoil. As ... ... middle of paper ... ... demand. Based on a dissertation written by BBBBB QE@2 can be seen as unnecessary and a wasted effort of the government to fix the financial crisis. The overall vie of quantitative easing is that is should be done, even if it has no effect on long term yields because it does no harm. The third and final attempt of the government to fix the financial crisis is the Operation Twist approach. This approach can be viewed as a mixture between QE1 and QE2. Slowly the economy is recovering from the financial crisis of 2007. As there is no one entity to blame for the financial crisis the all are victims of the rippling effect. Although the government has made attempts to save the economy from falling into a depression, there are no signs of huge growth in the housing market in near future. With the debris of this crisis still visible to many, the only true healer is time.

In this essay, the author

  • Argues that subprime mortgages, collateralized debt obligations, credit default swipes and frozen markets can explain the economic devastation that is still felt today.
  • Explains how the financial crisis of 2007 began by brining two groups of people together that had no prior direct relationship history.
  • Explains that before the financial crisis of 2007, investors had abundant money and were looking for opportunities to invest. the federal reserve chairman, allen greenspan, lowered interest rates to one percent to keep the economy strong.
  • Explains that moral hazard and cheap credit allowed investment banks to go make deals using leverage. leverage is borrowing money to amplify the outcome of a deal.
  • Explains how successful leveraging deals in the early 2000’s caused wall st to grow exponentially and investors began to want in on some of the action. the financial systems connected the investors directly to the homeowners through the use of mortgages.
  • Explains that investment banks bought mortgages directly from mortgage lenders and now sell them to investors, hedge funds, and investors.
  • Explains that the banker now wants more profits and calls the mortgage lender to find more homeowners. the only issue is that all of the qualified homeowners have homes.
  • Explains how the subprime mortgages became colossal when investment bankers began to own more homes and bring in less mortgage payments.
  • Describes how the investment banker is left with houses that have no value and calls up other investors in an attempt to sell the cdo but the investor is no longer interested because he is in the same situation. the ripple effect is at its peak and everyone goes bankrupt.
  • Explains that the government attempted to save the economy three separate attempts. quantitative easing is a monetary policy approach of purchasing large quantities of long term assets.
  • Analyzes how the second round of quantitative easing came in 2010 when the government decided to purchase over $600 billion in treasury bills over a six month period.
  • Opines that the only true healer is time. the government has tried to save the economy from falling into a depression, but there are no signs of huge growth in the housing market in near future.
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