Causes Of The 2008 Financial Crisis

In 2008 America’s financial system was brought to a stand still as decades of negligence and financial decisions caused our economy to sink into the worst recession since the great depression. Cultivating a problem worse than America has seen in roughly a century points one finger not at a particular cause, but a string of events that finally gave way. Now, eight years later our economy is still recovering, and time has allowed us to look back at decades of mistakes to try and connect the dots of the perfect storm that collapsed our financial market in 2008. In 2009 Brookings Institution, one of Washington’s oldest think tanks, concluded there were three causes that resulted in the crisis. Economists Martin Baily and Douglas Elliot stated that the results of government intervention in the housing market, the influences Wall Street had on Washington, and global economic forces were the three main causes of the economic collapse. They believed that a housing bubble inflated when Fannie Mae and Freddie Mac, two government-sponsored enterprises, intervened in the housing market. The banking industry was called out to be blamed for years of manipulation of our political and financial systems. Lastly, Baily and Elliot cite the global economy and the existence of a credit boom throughout European and Asian nations. Low inflation and consistent growth throughout the world economy spiked investors’ interest in acquiring riskier investments, which encouraged

Levin, Carl, and Tom Coburn. United States. United States Senate. Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. Washington: Committee on Homeland Security and Governmental Affairs, 2010.

The main cause of the Crash of 2008 was deregulation in 1980s of Financial Institutions which include Banks, Insurance Companies, Credit Rating Agencies etc. As a result of this deregulation, the Financial Institutions started playing in their own ways to get maximum personnel benefits. By the time the crisis was over, the top five executives of Lehman Brothers made millions of dollars between 2001 to 2007, the AIG’s Financial Product Division lost 11 billion dollars, instead of being fired, and Joseph Cassano, the head of AIGFP, was kept on as a consultant for a million dollars a month. The use of derivatives, subprime loans, and much greed within Wall street were all factors that caused the economy to drastically drop in the first place; making mortgage-backed securities in danger of defaulting. Brooksley Born was one of many that attempted to regulate derivatives; unfortunately she did not succeed. To pay for troubled assets from financial institutions, the Senate passed the $700 billion bailout bill that came out of taxpayers. Additionally President Obama came up with an economic plan that enforced regulation to speed up recovery. Although, I believe “command and control” was the wrong path to take.

After the Lehman Brothers’ investment bank failed, the stock market began to drop, and successful companies laid off a lot of the employees, therefore recession in America happened: This was the financial crisis of 2008. Two hypothetical solutions that could have cured this crisis are the creation of more pet banks, and the demolishing of Fannie Mae and Freddie Mac. With the creation of more pet banks, the local taxes would be less than if the government was taxing the people. And since so many people were left unemployed, a lot of people would be unable to pay their taxes. Therefore, with the smaller local state banks, people would not have to worry about paying the Federal Government. Additionally, having a larger supply of pet banks could result in the reinstalling of more employment opportunities for the unemployed workers. Moreover, less people would be unemployed, and people would be able to pay their taxes not only to local banks, but also to the Federal Government.

All of these components manufactured the financial crisis. Right after the crisis, banks were strict on lending to households and businesses. The decline in lending caused prices in these markets to trickle down, which means those that have taken a lot, had to contemplate on the rising prices and had to give up their estates in order to repay their loans. House prices became cheaper and everything burst. This lead banks to panic and cut their lending even more. A downward spiral resulted from all of this, and the economy went into recession.

The 2008 mortgage crisis was preceded by a series of missteps and unfortunate circumstances culminating in a perfect storm that triggered the worst financial meltdown since the great depression. After experiencing an 87% increase in average home prices between January 2002 and mid –2006, the mortgage market steadily declined and the boom began to subside. Unfortunately, the boom soon became a bust and by the end of 2008, housing prices were about 25% below the peak level achieved in 2006. As a result liquidity and capital disappeared from the market. (Jeune Renay. Lessons Learned In The Aftermath Of The Mortgage Crisis). A period of unusually high home foreclosure rates that caused an impact on the economy is still some years later an unfolding story in many American cities. It was not just a subprime event, but a much broader phenomenon that was among the most notable economic events of recent years. This was the result of irresponsible buyers who borrowed much more than they could afford. Regardless of the cause, foreclosure was difficult for the individuals who experienced it. They simply were buyers who had not done their homework. Today is safe to say that home buying isn’t for everyone. Despite all that has been said and done about this crisis, one realizes a need to understand and discuss the lessons learned as well as determine silver linings drawn from the event which will more fully illustrate how buyers are benefiting today. The following paragraphs will explain

Apparently, the financial crisis that began in August of 2007 were the product of several minor issues such as poor risk controls, too much leverage, and an almost willful blindness to the bubble-like conditions in the housing market but the actual root cause was the collapse of the ethical behavior especially on the part of the top executives of the most financial institutions and the loss of any sense of fiduciary responsibility to the ultimate client.

This paper was written to examine the causes of the financial crisis and Great Recession which can be materially tied back to decisions made in the 1970s and set the state for the crisis to occur. The paper invites the consideration of the key drivers that led to the subprime crisis that occurred long before 2007 and the result of a series of Acts that were ratified and the subsequent reforms that came about from these Acts. The Act that fanned the fire was the Community Reinvestment Act, which addressed a civil rights issue and a credit lending tendency to shun people of certain socioeconomic classes. Under the Act, various reforms made it fundamentally easier for people to purchase large capital assets no matter what their background

During the mid-1990s, the US economy had maintained stable growth, low unemployment, and low inflation; it was the longest undisrupted growth period post- the Vietnam War, the Dot.com Boom, and the stock market crash of 1987. Therefore, many politicians, economists, and consumers were under the assumption that the economy was very stable. But in reality this growth period was a façade because it was built on mortgage-backed securities. Ultimately, since fragility does not change, mortgage-backed securities was one the main catalysts for the 2008 financial crisis, a crisis that is still affecting the country today. Throughout this paper, I hope to inform you about the causes and effects of mortgage-backed serecurties.

The intention of this essay is to provide an in depth and critical analysis of the financial crisis that took place between 2007-2009, in particular focusing on some key issues raised by the Foote, Gerardi and Willen paper ‘Why did so many people make so many Ex Post bad decisions?’ Whilst there were many contributing factors, it is clear that a specific few played a particularly dominant role, primarily the ‘Bubble Theory’, irresponsible regulation, toxic CDO’s and $62 trillion of CDS’s.

After the financial collapse of 2008, the mortgage environment changed dramatically for both buyers and brokers. In order to protect consumers and raise confidence in the market, the Federal Reserve Board introduced regulations that limited what banks and mortgage originators could do such as curtailing certain business practices and imposing stricter requirements on capital. However, these actions have unintentionally affected broker competition, causing big banks to exit the housing market, which has led to the proliferation of shadow banks and higher-risk practices. These unforeseen consequences could potentially put the housing market at risk by creating a negative environment for consumers instead.

What Adam Smith argued about was that people needed to get or use math to get richer or get more money.

Upon analyzing the root causes of the financial crisis, I believe that the crisis could have been prevented by assuming the possibility it occuring, rather than projecting it as a far-fetched phenomenon. This is so as every aspect of the crisis, ranging from real estate agents selling clients homes they could not afford to investors partaking in questionable hedging activities was the result of individuals assuming that they could generate a profit without considering the consequences of their actions. Economist Phillip Das, as cited in a 2009 report by the Munich Personal RePec Archive elaborates on this theory by stating that “[f]inancial risks, particularly credit risks, are no longer borne by banks. They are increasingly moved

As the financial system moved forward after the S&L Crisis, what later became known as the parallel banking system began to bloom. In this system, commercial banks began to act like large investment banks and quickly the financial system as a whole became much larger, more complex and much more active in securitization. Some industry analysts say that it was advances in data processing and telecommunication that created economies of scale and scope in finance, and fostered the need for larger and more diversified financial institutions. As these banks became larger and much more powerful, they pressured regulators to strip away all barriers to competition and growth. This began to take hold with the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994 (RNIBBEA). This allowed bank holding companies to practice nationwide branching and acquire companies in other states. This led to mass consolidation that resulted in the top ten commercial and investment banks owning a combined 10.8 trillion dollars by 2007, and a 25% increase in all industry assets.

From the late 1990’s to mid-2000’s the United States experienced an unprecedented run up of real estate prices across the country that reached a peaked in 2006, in some areas up to an eighty percent increase. After the increase in prices, there was a sudden collapse of real estate prices in 2008, brought on by a surge in foreclosures, and an increasing inventory of housing.1 Foreclosure increases came from an unprecedented rise in mortgages called, subprime mortgages. These risky subprime mortgages, and the cottage industry within the financial sector that profited from them, created an overly leveraged and over exposed finance industry that created a massive recession when the bubble popped. In this essay, we will look into the many