According to USA Today, “Housing crisis deepens. Banks and hedge funds that invested big in sub prime mortgages are left with worthless assets as foreclosures rise. The damage reaches the top echelo... ... middle of paper ... ...ate wealth (GovermentStatSheet). Since then the American political economy has grown, strengthened, and reinforced the future since the learning period of 2008. The great recession is proven to be a point in time when financial funds didn’t exist but the United States government has analyzed and can now predict identical causes and annihilate them before they arise again.
Among the more recent ones are Black Monday (October 19, 1987), when the New York Stock Exchange experienced its biggest single-day loss in history, losing nearly 26 percent of its value; the dot-com bubble of 2000; and the subprime mortgage (housing bubble) crisis of 2007-2009. The Gramm-Leach-Bliley Act passed in the US in 1999 allowed financial services companies to engage in multi-segment transactions, but brought in stringent regulations for protecting the customer and ensuring solvency. But the industry came under strict government scrutiny following the collapse of the Enron Corporation in 2004 and accusations of fraud against top executives of JP Morgan Chase and Merrill Lynch and the bankruptcy of the financial services firm Lehman
This financial crisis also referred to as the great recession was triggered by liquidity problems in the United States economy. Many large financial institutions collapsed according to Geczy (2010). The government had to bail out some banks and this resulted in a decrease in the stock and money funds investments in the United States and spread on all across the globe. A report compiled by the U.S Financial Crises Inquiry Commission shows that the infamous global crises could have been avoided. It pointed out that failure in different financial institutions including the Federal Reserve accelerated the crises.
Furthermore, it became a worldwide phenomenon; “the way the debt was sold on to investors gave the crisis global significance. The US banking sector package sub-prime home loans into mortgage-backed securities known as CDOs (collateralised debt obligations). These were sold on to hedge funds and investment banks who decided they were a great way to generate high returns (and big bonuses for the oh-so-clever bankers that bought them). When borrowers started to default on their loans, the value of these investments plummeted resulting in huge losses for banks globally”, (timesonline.co.uk). As this was going on, consumers felt the effect of basic necessities prices increasing.
Even today, strong debates continue over major issues caused by the Great Recession in part over the accommodative federal monetary and fiscal policy (Economic Policy Institute, 2013). The Great Recession of 2007 – 2009 enlarges the longest financial crisis since the Great Depression of 1929 – 1932 that damaged the economy. The causes of the Great Recession all started as hundreds of billions of dollars was given to the United States abroad and financiers conceiving were to make a profit and what better way but the real estate market. Since the Community Reinvestment Act of 1977 and an expansion made in 1995 the than President Bush endorsed the program that created Option adjustable rate mortgages (nick-named “Pick-A-Pay”) to allow for bank to sell these options even though they were high risk (Conservapedia, 2013). The Community Reinvestment Act of 1977/95 is defined as to framework financial institutions, state and local governments, and community organizations to jointly promote banking services in the community” (Office of the Comptroller of the Currency, n.d.).
In addition, AIG, a leading financial company, downgraded its credit because of underwriting more credit derivative contracts than it could actually pay off. So on September 18, 2008, talks of a government bailout began. This send the Dow up 410 points and the following day Treasury Secretary Henry Paulson recommended that the Troubled Asset Relief Program (TARP) of as much as one trillion dollars be accessible to acquire the harmful debt to prevent a complete financial meltdown. “Also on this day, the Securities and Exchange Commission (SEC) initiated a temporary ban on short selling the stocks of financial companies, believing this would stabilize the markets. The markets surged on the news and investors sent the Dow up 456 points to an intraday high of 11,483, finally closing up 361 at 11,388.
On the same regard, the crisis rendered the consumers helpless, as those who bought the homes on mortgage were unable to repay consequently default rates skyrocketed. Conclusion In conclusion, the subprime crisis was historic economic crisis that the US and other European nations underwent. This kind of crisis can be avoided in future if the US government implements stringent policies guiding borrowing mortgage lenders and other private financial institutions (Rao, and Sisodiya, 34). The effects to both the consumers and the homeowners were severe and the overall result was the US recession. These economic situations can reoccur if the government and the private sector cannot embrace sound regulations and ensure they are implemented to the later.
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.
Impact on EU Governments The GFC caused a decrease in government revenues, but an increase in government expenditures in terms of GDP in 2008 and 2009, which significantly deteriorated deficits ... ... middle of paper ... ...wever, at the end of 2008, Germany was hit by the crisis through two channels; 1) Finance as many banks were overexposed to toxic speculative papers originating in the U.S and Ireland. Both private banks, such as Commerzbank and Hypo Real Estate, public banks had to be rescued by the government’s public guarantees costing €400 billion and 2) Export industry as the international demand decreased significantly . Although, the spending in the financial sector could harm Germany’s government debt in short-term, the debt was expected to maintain its position with low interest rates and capital gains from privatisation. With a strong financial position, Germany was expected a balanced budget, after spending on recovery plans. Though, Germany’s government debt to GDP kept rising since 2008 until 2011 from 64.9% to 82.5%, then decreased by 2.5% from 2011 to 2012 .
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.