2007-2008 Financial Crisis

1327 Words Feb 18th, 2013 6 Pages
The Global Financial Crisis of 2007-2008

The Global Financial Crisis 2007-2008 Economists and scholars spend years dissecting financial markets and evaluating the causes of booms and busts. Throughout United States history there have been multiple economic booms that were underestimated and followed by recessions. In the situation of the 2007-2008 global financial crisis many culprits have been identified as causes, such as loose monetary policy, credit booms, deregulation, over complexity, and greed. Since the economic boom was solely dependent on weak policies and misconceptions, this leads me to believe prevention was possible with adequate regulatory policy, risk assessment and clarifications for commercial banks.
Monetary
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Generally homeowners were required to meet certain qualifications in order to borrow funds for mortgages, also known as prime mortgages. Since the prime mortgage market had receded, lenders were encouraged to lower their requirements for lending and began to allow subprime mortgages. These less responsible homeowners began to default on their mortgages, which turned investment bankers’ stream of mortgage payments into empty houses. Increases in foreclosures raise the supply of available houses, which lowers the fair market values of houses. The prime mortgage homeowners were left with houses that were highly devalued relative to their mortgages and began to abandon their mortgage obligations. Mortgage lenders, investment bankers, and outside investors froze their activities, as they faced possible bankruptcy.
Regulatory/Supervisory Inadequacies Deregulation is believed to be the underlying cause of all economic downturns, as its scope of responsibility reaches all markets. In the 1930s the United States experienced a bank crisis that sparked a widespread distrust in the banking system and people withdrew their money from the depository institutions overnight. The sudden retraction of the money supply from the economy caused many banks to close and the economy to suffer. The Banking Act of 1933, also known as the Glass-Steagall Act, was created to insure depositors’
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