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The Credit Crunch

explanatory Essay
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In the late 2000’s what was known as the “Global Recession” or “The Credit Crunch” occurred. The only financial crisis comparable to the recent 2008 United State recession was the Great Depression, which occurred in the 1930’s. The financial crisis of the late 2000’s resulted in the downfall of the largest financial institutions as measured by market capitalization vales. The situation created the need for governments and regulators to bailout most banks and caused dramatic drops in stock market values around the world (Allen, 198). However these were only the effects seen on a macroeconomic level. Throughout America millions of people found themselves homeless as the housing market began to collapse upon itself. These evictions and foreclosures were a major contributing factor the failure of many businesses, which were dependent on consumer spending for their revenues (Allen 198). The failure of these businesses led to a huge decline in consumer wealth that is estimated to be in the trillions of US dollars. By 2008, due to the failures of large financial institutions, there were severe liquidity problems within the US banking system. When the housing bubble peaked in late 2007 the values of securities linked to U.S. real estate pricing began to plummet (Stiglitz 55). This was a critical hit to financial institutions across the globe. Questions began to arise amongst consumers and members of government alike in regards to the solvency of banks due to poorly performing loans and mortgages, which in turn led to declines in the availability of credit. The complete loss of investor confidence impacted stock markets globally. Securities suffered large losses during late 2008 and early 2009. As the restrictions on credit gr... ... middle of paper ... ...factoidz.com/what-caused-the-great-recession of-20082009/>. Nabli, Mustapha K.. The Great Recession and developing countries: economic impact and growth prospects. Washington, DC: World Bank, 2011. Print. Nagle, Jeanne. How a recession works. New york: Rosen Pub., 2010. Print. Rosenberg, Jerry Martin. The concise encyclopedia of the great recession, 2007 2010. Metuchen, N.J.: Scarecrow Press, 2010. Print. Stiglitz, Joseph E.. Freefall: America, free markets, and the sinking of the world economy. Pbk. ed. New York, NY: W. W. Norton & Co., 2010. Print. What should the federal government do to avoid a recession?: hearing before the Joint Economic Committee, Congress of the United States, One Hundred Tenth Congress, second session, January 16, 2008.. Washington, D.C. : U.S. G.P.O. : Supt. of Docs., U.S. G.P.O., distributor, 2008: U.S. G.P.O. :, 2008. Print.

In this essay, the author

  • Explains that the "global recession" or "the credit crunch" occurred in the late 2000's. the only financial crisis comparable to the 2008 united states recession was the great depression.
  • Explains that evictions and foreclosures contributed to the failure of many businesses, which were dependent on consumer spending for their revenues.
  • Explains that by 2008, due to the failures of large financial institutions, there were severe liquidity problems within the us banking system. when the housing bubble peaked in 2007, the values of securities linked to u.s. real estate pricing began to plummet.
  • Explains how the loss of investor confidence impacted stock markets globally. the government's response to this was fiscal stimulus programs, which consisted of monetary expansion as well as large institutional bailouts.
  • Explains that the global recession occurred due to risky and complex financial products misunderstood, the failure of regulators to monitor properly, and the reluctance of credit rating agencies to be brave and honest.
  • Explains that the complex financial products that were bundled, traded and sold prior to the 2008 recession were the first sign of a weakening economy.
  • Explains that the housing market in the u.s. peaked in 2006 and was quickly followed by a quick decline due to refinancing of homes.
  • Explains that traditional mortgages involved a bank loaning money to homeowners and holding the credit risk. with the arrival of securitization banks began selling mortgage-backed securities and collateralized debt obligations.
  • Explains that the federal reserve lowered the federal funds rate to dampen the effects of the dot com bubble crash in the early 2000's and an attempt to ward off the perceived risk of deflation.
  • Explains the increase in mortgage-backed securities issued during the mid 1990's, which increased to seven and a half trillion u.s dollars between 1997 and 2007.
  • Explains that mortgage companies started lending money for homes to anyone and everyone, regardless of their income or credit rating. lending standards were lowered until people with no jobs, income, assets, and credit ratings could get mortgages for no money down.
  • Explains that mortgage unerwriters encouraged applicants to lie on their mortgage applications. these loans were known as sub-prime or ninja loans, with low initial teaser rates and adjustable rate mortgages.
  • Explains that the rating companies contributed to the great recession. they correctly rated collateralized debt obligations as investment grade securities without even knowing what was in each piece.
  • Explains that credit rating agencies are under examination due to the collapse of the housing market. they suspect that they gave investment grade ratings to mortgage-backed securities based on risky subprime mortgage loans.
  • Explains that laissez faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs, and enforced monopolies.
  • Explains that the government policies instituted to protect the united states from this type of crisis failed as well.
  • Explains that deregulation is the removal or simplification of government rules and regulations that constrain the operation of market force.
  • Explains that jimmy carter's depository institutions deregulation and monetary control act of 1980 cut out many restrictions on the financial practices of banks.
  • Explains that bill clinton signed the gramm-leach-billy act in 1999, which separated commercial banks from investment banks. the u.s securities and exchange commission made net capital rules lenient in 2004, which fueled the growth in mortgage-backed securities.
  • Explains that regulators allowed depository banks such as citigroup to move noteworthy amounts of assets and liabilities off-balance sheet into complex legal entities called structured investment vehicles.
  • Explains that recessions cannot be avoided in a healthy economy because of the contracting and expanding period. the global recession was caused by risky financial products, credit rating agencies, and government deregulation.
  • Cites allen, roy e., bloomenthal, karen, and brinkley, alan. the end of reform: new deal liberalism in recession and war.
  • Cites furchtgott-roth, diana, and joejolly, joe, who caused america's 2007 great recession.
  • Narrates how the recession for dummies was written by walter kirn and paul r. krugman.
  • Cites mikels, richard, and cohen's article, "what caused the great recession of 20082009?."
  • Explains the impact and growth prospects of the great recession.
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    • Explains that 2008 was a scary year for anyone involved in the us stock market. due to subprime lending, and cheap mortgages, the housing market collapsed. fear of economic instability caused people to pull their money from any investments.
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    • Opines that justice has been served monetarily to madoff's family, since his son, mark, committed suicide in 2010, leaving behind two children.
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