term paper

With the allegation of collapse from large financial institutions, and the bailout of banks by the government, began the second great depression. Many believe that we are still stuck in this recession and have not completed anything to get out of this situation that’s affecting our nation. I believe that the economic crash in 2008 was the finale building block towards a more structural society, political system, and government in the United States of America. There are a vast amount of listed causes that lead to the 2008 economic collapse, but only a few really dealt the damage. The problems arrived over a period of time from 1995 to 2008.

Ocaya (2012) state that the credit crisis is a financial market or economic meltdown of borrowing the funds to the borrower and cannot get back, it evaluated by severe shortage of money or credit bring accumulation of bad debts, defaults and falling financial institutions among others. However, the experts and economists are unclear as what form a credit crisis. The Wall Street defines a credit crisis as a “period during which borrowed funds are difficult to get and, even if funds can find, interest rates are very high”. Credit crisis mostly began in 2007. The effect of the credit crisis has brought fall down on the housing market in some country resulting in foreclosures and unemployment.

However, with or without human judgment, financial models of credit risk are subject to manipulation, both legally and fraudulently. The forced liquidation of some $3 trillion in private label structured assets has been deprived from the financial markets and the U.S. economy has obtained a vast amount of liquidity that the banking system simply cannot restore. It is not as easy to just assign blame within these case however it is noted that the credit rating agencies unethical decisions practices helped add onto the financial crisis of 2008 and took into account the company’s well-being before any other stakeholders.

Finally, credit available in the market had become lesser and lead to the boom of the credit crisis (Investopedia, 2013). The financial crisis of 2007-2008 with the failure of Lehman Brothers is a great illustration of the credit crisis. A sudden change of the financial circumstance in the credit market had started a global financial crisis which has left a significant effect almost every part across the financial world (YaleGlobal Online, 2013). After that, many researchers started to investigate the causes that lead to this credit crisis. Particularly, some of them argue that bank chief executive officer (CEO) incentives are the major factor that causes credit crisis.

Background of financial crisis In 2008, a severe financial crisis arose in American. By the high level of interconnection between each economy, this financial crisis caused several financial problems in different countries at the same time. Gary Yates (2009) pointed that the UK is having a worse economic growth caused by a snowball effect of banking crisis. Facing this situation, economists have summarised the fundamental factors of this financial crisis which includes: different development levels of each country around the world; underestimation and incorrect analysis of financial risk; liquidity risk and unwillingness of lending were faced by banks after lots of investments went bad; too much debt were created and `shadow banking ‘system were set up unregulated. The failure of UK’s financial regulation system The reasons of the failures Although the UK financial system is extremely good in terms of economic ... ... middle of paper ... ...again is essential for the UK to avoid a crisis.

Lender had adjusted the interest rate of borrowing to unaffordable rate. Credit crisis decrease the total demand and fall in supply, therefore, it constrains the growth of the economy. The credit crisis is begun in the early 2006 when several events relating the financial system went wrong in the United States of America. The factors leads to credit crises are complex with varying weight. Diamond and Rajan (2009) found that investment misallocation is the proximate cause of the credit crisis.

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. What at first seemed to be an economic slump turned into a brutal crisis, and all eyes looked to the Government and Federal Reserve to help the economy.

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.

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.).

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. The Mortgage Default Crisis A majority of mortgage defaults that Americans used were on subprime mortgage loans, which were high-interest-rate loans lent to people with high risk credit rates (Brue). Despite knowing the risks, the Federal government encouraged major banks to lend out these loans to buyers, in hopes, of broadening ho... ... middle of paper ... ...arch 4, 2014, from http://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf Brue, S. L., Flynn, S. M., & McConnell, C. R. (2011).Economics principles, problems and policies.