Excessive Growth Of Credit And Asset Prices

The fact that banks control 97% of the world's money supply makes them a vital institution. Banks are the engine of our modern financial system and a source for economic growth. The bank's ability to create credit can have destructive effects; the Great Depression of 1929 and the Great Recession of 2008. In both cases, banks spurred on an asset bubble through overextending credit to aid the purchase of assets. The result was an economic collapse that wiped out wealth and reduced credit creation which stalled productive investments. The lessons of the two great economic collapse support the notion proposed by the author, that bank credit for transactions that do not contribute to the economy should be restricted.

The subprime mortgage crisis that took place in the united states was the start of events that led to the (2008) financial crisis, marked by a hike in subprime mortgage defaults and foreclosures. I seek to discuss in my paper the U.S. causes that eventually led to the subprime mortgage crisis. Like, low interest rates and housing prices, and how this eventually led to a localized credit dilemma in other financial regions that finally made a difference in the actual economy or the financial system. In earlier years, financial economic activity had grown rapidly and varying financial invention methods had been misused and abused vastly, which is the key cause of this multinational financial crisis/dilemma. In addition, the involvement of shadow banking companies as they played an important role in the collapse of the financial system crisis. Furthermore, I plan to list each economic issues included in this subprime mortgage crisis, as well as, other factors that eventually led to this crisis. I will be answering questions, such as the relief measures that were used to restore life to the weakened financial system.

“There are many factors that led to the build up of the crisis. At the top of the list is excess liquidity, resulting in too much credit and weak underwriting standards. The vulnerability of the banking

It is undeniable that the political has a great impact on the finance crisis in 2008. In this journal, the writers have brought up the practical reasons causing the biggest recession in the world. However, the root cause of the financial crisis stemming from the credit crisis and real estate in America. Real estate bubble increasingly growing had put the housing market in the USA and many European countries in danger. Cheap credit was the starting point for the real estate bubble, following by the imbalance of monetary policy of the U.S. Federal Reserve. Furthermore in 2007, a number of American credit institutions such as New Century Financial Corporation had processed procedures for bankruptcy. Some are leaving the depreciation of its shares

Profits rise relative to the wages, as well as the family income goes to households with the highest incomes, produced a large and growing number of money to invest, these funds want to transcend the existing investment opportunities. All of this provides good conditions for emergence of the asset bubbles, because these funds are used to buy assets like real estate and securities. If an asset bubble began to appear, then its growing need a economic system, which can easily encourage the growth of the bubble by borrowing and it was turned out that the financial system deregulated, short-term capital department is preparing to do so in the new era of laissez-faire capitalism. After 2000, deregulated, short-term capital department created a new mortgage business, which occupies a lot in house purchase loans and is still in increasing, making potential for the last asset bubble.

Based on the issue discussed in this article whereby households are making fewer borrowings due to much regulations imposed by the Dodd-Frank act `s Consumer Financial Protection Bureau making borrowing stringent due to many requirements and higher lending rates that make the households to shun from taking mortgage loans, it is imperative to make changes to the national budget so as to stimulate lending. Accordingly, the national budget should cut taxation on a financial institution, especially on the mortgage. This will, in turn, compel the financial institutions to also lower their lending rates to their customers. This will stimulate more borrowing from the households who will, in turn, invest their borrowed amount in viable projects that will stimulate the economic growth. Nonetheless, this lending ought to be monitored so that the money borrowed is invested in worthy projects that can produce significant returns and also to avoid the effect of inflation. Besides, the national budget should cut down on taxes charged on construction materials. This will enable the investors to invest in real estate by either using their savings or by borrowing from financial institutions. The aggregate effect will be economic growth and increased Gross Domestic Product.

This paper is about the financial crisis in 2008 and how it all started as well as the ways that banking has operated and is operating today. I have watched all of Chairman Bernanke’s college lecture videos and he has gone into many different aspects of banking including how the Federal Reserve began, what lead to the recent financial crisis, and what we are doing as a nation to see what we can do to help eliminate from happening again. First, I will be summarizing Chairman Bernanke’s four lectures he did in 2012 at George Washington University.

However, Bernanke admonished investors by the book that even though banking regulation and supervision protect investors as always, if some particular events or financial crisis happened, like housing bubble and mortgage markets crisis, either or both of these two system work. The example in the book is booming house prices in 2000s. After the sharply increasing of housing prices, risky mortgage lending likes subprime lending trouble began surfacing in 2006 and 2007. The risky mortgage comes with more demand for housing, which will again push the housing prices higher and higher, reinforcing a vicious cycle. As a result, because of the nominate housing price is much higher than the real price, the careful lenders who have good credit step out the market, the rest of borrowers are subprime lenders, “some borrowers were defaulting on loan after making only a few, or even no, payments.” (318) In the book, Bernanke conceded that Fed responded the trouble slowly and cautiously. When Board in Washington determined to make supervision of bank more centralized, he still overconfidently believe that Reserve Bank staff were better informed about condition in their districts. Another Bernanke’s conceit is that the financial regulatory system was not as stable and comprehensive as he thought before the financial crisis. In

Between 2007 and 2008, the impending mortgage crisis met its peak, and subsequent “burst”. In simple terms, over the years leading up to the housing bubble, banks loaned out large amounts of money to the people in an effort to stimulate the economy. Those who originally did not qualify for such large loans, now did. However, these subprime borrowers (borrowers with a poor credit history) often could not actually afford their payments, leading them to file for bankruptcy, and pushing the country closer toward the recession and the collapse of the housing market. The rise in subprime mortgage delinquencies and foreclosures meant a severe decline in securities. As the recession escalated, the wellbeing of financial institutions and citizens alike

When the net worth of an agent falls, adverse selection and moral hazard problems increase in credit markets \citep{Boivin2010}. More specifically, contractionary monetary policy decreases the net worth of agents and firms, implying less collateral for the loans, and, consequently, increased losses due to the adverse selection. This again tends to cause more reluctant lenders, evident by their demand for higher risk premium or reducing the volume lent out, causing a decline in spending and aggregate demand (\citet{BernankeGertler89}; \citet{bernanke1999}). Beyond this asymmetric information problem, the lower net worth of firms devalue owners’ equity stake in their firms implying increased risk appetite. Again, this causes a decrease in the loan supply and thus a decrease in aggregate output. Furthermore, increased interest rates transmits into higher debt burden for loans with floating interest rates. The increase in interest rates suggests that the cash flow of firms and households weakens, leading to decreasing investments and

Doing so effectively requires us to be successful in both identifying the incipient bubble and in developing and implementing a response that will limit bubble growth and avert a destructive asset price crash. This is not easy because asset bubbles are hard to recognize in real time and each asset bubble is different. However, these challenges cannot be an excuse for inaction. Recent experience strongly suggests that asset bubbles exist and that their collapse can be very damaging to the financial system and the macroeconomy. In my view, a proactive approach is appropriate when three conditions are satisfied: First, circumstances should suggest that there is a meaningful risk of a future asset price crash that could threaten financial stability. Second, we have identified tools that might have a reasonable chance of success in averting such an outcome. Third, we are reasonably confident that the costs of using the tools are likely to be outweighed by the benefits from averting the prospective crash. When these three conditions are satisfied, we should be willing to

The financial crisis was triggered by a complex interplay of policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled subprime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts.

The onset of summer tends to bring a lull in excitement levels in financial markets. The media is consequently forced to exaggerate the importance of economic releases over this seemingly mundane period, and this year has proven to be no exception. The Financial Times recently reported that US consumer credit had surged by $18bn in the three months to June, thereby provoking fears that banks were being reckless and consumers were taking on too much debt in a slow economy. These fears constitute a major departure from the worries that prevailed during the financial crisis, when many commentators were forecasting years of household deleveraging. Balance sheet adjustment in the sector would,

The 2007-2008 US ‘credit crunch’, also known as ‘subprime mortgage crisis’, is one of the largest financial distortions that has recently struck US economy and resulted in the huge slump in the economic activity. Actually, there most likely exists no single reason that has led to the financial crisis of such degree but rather a simultaneous combination of several practices in the US economy of that time. Experts usually distinguish the following diverse causes of 2007-2008 US ‘credit crunch’: the increase in the spread of the structured finance products which lacked transparency, deregulation of financial sector and lack of financial institutions’ supervision, inappropriate credit ratings assigned by credit rating agencies on complex financial products, excessive lending activities that has led to the increase in credit risk, lack of adequate liquid reserves to back the existing commitments and some others. Generally, all these causes can be divided into two main groups: one attributed to the fails of government regulations and supervision and the other attributed to the increased popularity of financial innovations. This essay will discuss all major reason that contributed to the start of the crunch and prove that credit risk attributed to lending activities is not the root cause but rather one of consequences of the spread of financial innovations and thoughtless government policy. The structure of the essay is the following. The essay starts with giving a brief overview

This chapter is about the background of 2007-2008 financial crisis. The 2007-2008 financial crisis has a huge impact on US banking system and how the banks operate and how they are regulated after the financial turmoil. This financial crisis started with difficulty of rolling over asset backed commercial papers in the summer of 2007 due to uncertainty on the liquidity of mortgage backed securities and questions about the soundness of banks and non-bank financial institutes when interest rate continued to go up at a faster pace since 2004. In March 2008 the second wave of liquidity loss occurred after US government decided to bailout Bear Stearns and some commercial banks, then other financial institutions took it as a warning of financial difficulty of their peers. In the meantime banks started hoarding cash and reserve instead of lending out to fellow banks and corporations. The third wave of credit crunch which eventually brought down US financial system and spread over the globe was Lehman Brother’s bankruptcy in August 2008. Many major commercial banks in US held structured products and commercial papers of Lehman Brother, as a result, they suffered a great loss as Lehman Brother went into insolvency. This panic of bank insolvency caused loss of liquidity in both commercial paper market and inter-bank market. Still banks were reluctant to turn to US government or Federal Reserve as this kind of action might indicate delicacy of