Financial Crisis Of 2007-2008 : What Regulatory Change Is Advisable?

The Federal Government needs to make sure to enforce strict guidelines on who can and cannot be accepted for a home loan, and not allow big investors to borrow excessive money at low interest rates to inflate the investor’s financial advantage. If the government starts allowing lower standards on mortgages, we are going to end up in the same catastrophe once again. In an article written by U.S. News and World Reports entitled Should the Federal Government Provide Support to the Mortgage Market?, the Federal government and the President attempted to get involved with the housing market. The passage implicated that Obama wanted to do away with federally funded conglomerates Fannie Mae and Freddie Mac and implement another type of government assisted program ("Should the Federal Government"). The program would prevent the mistakes made by Fannie and Freddie which created the original “housing bubble burst” ("Should the Federal Government"). One of the Senate bills suggests the government create “a new agency, the Federal Mortgage Insurance Corporation to replace Fannie and Freddie” ("Should the Federal

We now know to keep financial regulations in place to prevent another economic catastrophe. After fall of 2008, the

Real estate values further rose, luring lenders into taking more risks in their financial transactions. All this was done in the hope of raking in huge sums of dollars since the prices of the mortgages had gone up. Consequently, a large number of people, including those who would not have qualified under normal conditions, were able to secure mortgages. They soon realized that they had blundered but it was too late. Due to increased supply of homes being disposed off by lenders and other financial institutions, the demand went down sharply. There was no more money flowing in the economy as many people now stopped taking the mortgages. This could have resulted into the mortgage crisis.

Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came

During 2007 through 2010 there existed what we commonly refer to as the subprime mortgage crisis. Through deduction of readings by those considered esteemed in the realm of finance - such as Ben Bernanke - the crisis arose out of an earlier expansion of mortgage credit. This included extending mortgages to borrowers who previously would have had difficulty getting mortgages; this both contributed to and was facilitated by rapidly rising home prices. Pre-subprime mortgages, those looking to buy homes found it difficult to obtain mortgages if they had below average credit histories, provided small down payments or sought high-payment loans without the collateral, income, and/or credit history to match with their mortgage request. Indeed some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA), otherwise, those facing limited credit options, rented. Because of these processes, home ownership fluctuated around 65 percent, mortgage foreclosure rates were low, and home construction and house prices mainly reflected swings in mortgage interest rates and income.

The financial crisis of 2007-2009 resulted from a variety of external factors and market incentives, in combination with the housing price bubble in the United States. When high levels of bank and consumer leverage appeared, rising consumption caused increasingly risky lending, shown in the laxity in the standard of securities ' screening and riskier mortgages. As a consequence, the high default rate of these risky subprime mortgages incurred the burst of the housing bubble and increased defaults. Finally, liquidity rapidly shrank in the United States, giving rise to the financial crisis which later spread worldwide (Thakor, 2015). However, in the beginning of the era in which this chain of events took place, deregulation was widely practiced, as the regulations and restrictions of the economic and business markets were regarded as barriers to further development (Orhangazi, 2014). Expanded deregulation primarily influenced the factors leading to the crisis. The aim of this paper is to discuss whether or not deregulation was the main underlying reason for the 2007/08 financial crisis. I will argue that deregulation was the underlying cause due to the fact that the most important origins of the crisis — the explosion of financial innovation, leverage, securitisation, shadow banking and human greed — were based on deregulation. My argument is presented in three stages. The first section examines deregulation policies which resulted in the expansion of financial innovation and

In 2008, the US economy entered a period known as the Great Recession. This was primarily the result of banks granting housing loans too freely and at variable rates. When the rates rose too high for the home owner to pay, they forfeited. Then the banks had unpaid loans and houses that they could not sell. This resulted in a chain of events that impacted the banking, insurance and investment industries. The decline in construction and spending resulted in an increase in the unemployment rate to as high as 10% in 2009. This period of Recession was the worst since the Great Depression of the 1920s and 1930s. (Great Recession in the United States. (2011, September 11). In Wikipedia, Retrieved June 20, 2016, from https://en.wikipedia.org/wiki/Great_Recession_in_the_United_States)

The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Considered by many economists to have been the worst financial crisis since the Great depression of the 1930s. Economist Peter Morici coined the term the “The Great Recession” to describe the period. While the causes are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in the trillions of dollars range), substantial government intervention across the globe, and a significant decline in economic activity. Both regulatory and market based solutions have been proposed or executed to attempt to combat the causes and effects of the crisis.

The main reason for the crisis was a boom and bust in the housing markets at the same time. Home values rose rapidly during the beginning of the 2000’s. Many homeowners used their homes and other assets to withdraw equity to produce add-ons to the house, such as kitchens, decks, or patios. Once the value of the houses went down, they could not pay off this extra debt. Homes were beginning to be valued at less than what the homeowners owed on them. This period was powered by leverage, securitization, and structured finance. Housing was a hot commodity at that time, and Americans were taking out hefty loans in order to pay for them. There was a rise in self-employment at that time, and borrowing money was very relevant at that time. Adjustable rate mortgages, which provided initial interest rates and low monthly payments were the most common form of loans between 2004 and 2008. The banks were not careful in their securitization of loans, and a lot of loans defaulted. The defaults mainly revolved around the failing of the housing market. At the time, there was low requirements for down payments on houses. Lenders were only asking for approximately 3%, today it is up around 10% (Golub). This allowed for more and more people to put a down payment on a house, who would not be capable of paying the banks back. During this time, there was a dramatic increase in sub-prime lending, which means that the people borrowing the money had lowering credit

Interest rates began to increase again and so did home ownership costs. The Federal Reserve raised federal funds up to 5.25% for which it stayed for three years after June 2004. No one wanted to purchase a house anymore, home prices began to drop leading to a 40% decline in the U.S Home Construction Index. Home owners began to default on their loans and lenders began to fill for bankruptcy. The result of all these events were the leading cause to complete chaos. Everyone was so focused on the satisfaction of buying homes, selling homes and lower interest rates that it made for a bigger hit to the

From the U.S. Housing Bubble to the greed and deception of investors, the United States economy was beginning to fall during this time period. The Community Reinvestment Act was showing its effects nearly thirty years prior to the bursting bubble. Being forced to meet quotas and avoid penalties, banks were almost forced to sell mortgages to anyone, even if they could not afford them. They believed that the only way to grow was to discontinue the verification of things such as income, in order to gain more customers in the mortgage market. Fannie Mae and Freddie Mac were created to provide liquidity, stability, and affordability to the mortgage market. In reality, they just created the early steps of securitization, increasing the greed and deception of

Leading central banks around the world assisted in regaining the financial system and bringing the economy back to good terms at the peak of the financial crisis. Together they helped stop the financial system from upturning, and with tremendous effort, helped reestablish financial and economic stability. The United States’ central bank is known as the Federal Reserve, and they are accountable for making sure the country’s financial system functions effortlessly. During the crisis of 2007-2009 the Federal Reserve was passive and did not take the lengths necessary to help stop or slow down the upcoming crisis. Throughout this paper I will discuss what steps were taken and what steps should have been taken to help the United States during this time of financial instability.

The housing market crash, which broke out in the United States in 2007, was caused by high risk subprime mortgages. The subprime mortgage crisis resulted in a sudden reduction in money and credit availability from banks and other lending institutions, which was referred to as a “credit crunch.” The “credit crunch” and its effect spread across the United States and further on to other countries across the world. The “credit crunch” caused a collapse in the housing markets, stock markets and major financial institutions across the globe.

In 2008, the US experienced the traumatic chaos of a financial downturn, whose effects rippled throughout Europe and Asia. Many economists consider it the worst crisis since the Great Depression, and its alarming results are still seen today, a long six years later. Truly, the recession’s daunting size and formidable wake have left no one untouched and can only beg the question: could it have been prevented? The causes are manifold, but can be found substantially rooted in illogical investments and greedy schemes.

The new lackadaisical lending requirements and low interest rates drove housing prices higher, which only made the mortgage backed securities and CDOs seem like an even better investment. Now consider the housing market which had become a housing bubble, which had now burst, and now people could not pay for their incredibly expensive houses or keep up with their ballooning mortgage payments. Borrowers started defaulting, which put more houses back on the market for sale. But there were not any buyers. Supply was up, demand was down, and home prices started collapsing. As prices fell, some borrowers suddenly had a mortgage for way more than their home was currently worth and some stopped paying. That led to more defaults, pushing prices down further. As this was happening, the big financial institutions stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans. By 2007, some big lenders had declared bankruptcy. The problems spread to the big investors, who had poured money into the mortgage backed securities and CDOs. They started losing money on their investments. All these of these financial instruments resulted in an incredibly complicated web of assets, liabilities, and risks. So that when things went bad, they went bad for the entire financial system. Some major financial players declared bankruptcy and others were forced into mergers, or needed