Financial Crisis After The Great Depression

In order to encourage people to buy more houses and boost the real estate market, the homebuilders, financial lenders, and the government created new financial instruments of calculation that were not researched properly. Lenders sold mortgages to investors that allowed the risk of default to be covered even though the mortgage was in a financial stretch for the borrower. Borrowers did not read the fine print and made decisions that they could not afford. The major banks Federal and otherwise, kept the interest rates low causing investors to take risks to get high returns in the short term, disregarding the long terms security of the whole process.

The Great Recession and the Great Depression are the aftermath of mostly similar economic difficulties and are only different in a few respects. Each period is marked by a massive run ups in asset prices followed by a crash in the stock market and sent both debt and equity markets down. These periods are said to be the worse economic downturn in the country’s history. During the great depression, as banks failed and threatened to shut down the financial system altogether, President Franklin Roosevelt moved quickly and effectively to address the most dangerous financial crisis of the Great depression. During the great depression, the stock market collapse that began in October 1929 took away huge amount of wealth due to the greedy activities of the financial institutions who lent out money hastily and later had less even in their reserves. He created the New Deal which responded to an unemployment rate that had reached 25 percent, and in some cities as much as 75 percent. He signed the Emergency Banking Act, where investigators deemed it right for banks to continue their operations. “The Glass-Steagall Act created a barrier between commercial and investment banking and established the Federal Deposit Insurance Corporation, which provides a warranty that customers funds will be secured(Brinkley)”.

The definitive effects of the securitization of subprime mortgages on the financial crisis accentuated the prominent failure of institutions to follow proper risk management and investment guidelines. Financial institutions, failed to aligned company goals with risk management practices and instead fueled greed by issuing monetary incentives based on the quantity of subprime loans issued or securities sold, rather than concentrate on the quality. Investment banks such as Lehman Brother, Bear Stearns and Merrill Lynch all participated in risky investment practices, which compounded the institutions risk and involvement in the securities. In 2006 Merrill Lynch doubled their endeavors in mortgaged backed securities and by the

The Global Financial Crisis of 2008 is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It resulted in the threat of total collapse of large financial institutions, the bailout of small and big banks by national governments, and downturns in stock markets around the world. In United States, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer confidence, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European

Predatory lending and meticulously intricate loan pooling helped cause the destruction of this market. Essentially, financial institutions were handing out mortgages to people that were often struggling to repay them, and these Mortgage Backed Securities (MBS 's) were often resold to investors that were unaware of the systemic risk they had purchased. These high-risk loans were gathered together and sold as low-risk securities due to a lack of diversity in the overall portfolio. As these toxic MBS 's were resold into the marketplace, they were separated and reorganized, making it extremely difficult to track the actual value of the derivatives of the bonds.

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

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 presence of Mortgage Backed Securities (MBS) in many family’s hedge fund, mutual fund and pension plan investments gave the subprime lending of small local banks a nationwide impact. Mortgage Backed Securities originate in a regional bank, these smaller banks then bundled up many mortgages and sold the bundle of mortgages to big investment banks. The negative impact would have been limited if it had not been for the large presence of MBS in the many common investment portfolios. These investment banks then make a corporation and put the mortgages as assets of the corporation. From there, the

The most popularly known subprime mortgage crisis came into lime light when a steep rise in home foreclosures in 2006 spiraled seemingly out of control in 2007, triggering a national financial crisis that went global within the year. The maximum blame is pointed at the lenders who created such problems. It was the lenders who ultimately lent funds to people with poor credit and a high risk of default. When Fed flooded the markets with increasing capital liquidity, its intention was not only to lower interest rates but it also broadly depressed risk premiums as investors sought riskier opportunities to bolster their investment returns. At that point of time, lenders found themselves loaded with capital for lending out and higher willingness to undertake higher risks in a surge to get greater investment returns. To overcome of the financial instability and housing price bubbles, Federal Reserve has to intervene to combat these issues.

There have been few financial crises in the United States. The Global Financial Crisis of 2008 to 2009 was the most recent and before that was The Great Depression of the 1930s. The Global Financial Crisis actually began in 2007 when prices of homes tanked. It not only affected the U.S. but it also affected economies overseas. The entire investment banking industry, some of the biggest insurance companies, enterprises government used for mortgage lending, top mortgage lenders, the largest savings and loan companies, and two of the largest commercial banks were many of the financial sectors affected by the crisis. “Banks stopped making loans, share prices plunged throughout the world and most of the world plummeted into a recession” (The Financial Crisis of 2008: Year In Review 2008,” 2009, para. 1).

The cause of the 2008 financial meltdown was caused by many different things that created the “perfect storm”. Some of these factors include Wall Street greed, individual greed, Barney Frank and home-ownership “promoters”, mortgage brokers, subprime loans, Alan Greenspan and The Fed, credit default swaps, greedy investors, speculators, unethical or incompetent rating agencies, Republicans, Democrats, Congress, and Presidents (Terry 2013). There were numerous things that caused the meltdown and we may not even know all the factors. What we do know is that it happened and it happened fast.

There have been many accounts on what the financial crisis was and how it started with different people giving different opinions on what caused the crisis. According to the IMF (international Monterey Fund), it is said to be the worst financial crisis since the Great depression of the 1930’s.

And the other causes are securitization practices, inaccurate credit ratings, government policies, policies of central bank and financial institutions debt levels. Securitization is structured finance process in which assets, receivables or financial instruments are acquired, pooled together as collateral for the third party investments( Investment banks). There are many parties involved. Due to the securitization, investor appetite for mortgage-backed securities (MBS), and the tendency of rating agencies to assign investment-grade ratings to MBS, loans with a high risk of default could be originated, packaged and the risk readily transferred to others that began in 1970. Now things start to get complicated. Pieces of mortgage-backed securities can be inserted into new investment vehicles, with a remarkable result: investments originally rated as risky can re-emerge rated as safe. This can be done when An investment bank creates a new security from risky slices of multiple securities. In

The economic crisis of 2008 was one for the ages, it changed the world of investing forever. That year, the stock market crashed, bank failures and the infamous wall street bailout that can all be traced back to the subprime mortgage crisis.. The 2008 economic crisis rocked the global economy for the worst, and to this day the United States is trying to recover from the impact that the crisis had.

The 2008 financial crisis leaded the USA to one of the most important recession after the Great Recession of 1980. It started in 2006 with the subprime crisis, and the proliferation of mortgage backed securities following by the estate crisis. The crisis was global ; it affected the whole economy; the financial institutions as well as the households and investors, and caused a stock market crash in September 2008. The government proposed several plans and packages to overcome the situation.