Financial Crisis : The Fiscal Crisis

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The second week of October in 2008 was the worst week for stock market during 75 years, Buckley (2011) state that the worst record was the Dow Jones Industrial Averages dropped 22.1%, but it fell 44.3% then. In general, a financial crisis is not an accident; it may take several years and has complex and interlaced causes (Claessens and Kodres, 2014). The 2007-08 global financial crisis is a typical case due to long-term non-intervention policy and loose regulation for financial market from government. Moreover, it involved the complex relationship between government and financial institutions. In order to look at this issue in particular, this essay first goes though the timeline of the 2007-08 financial crisis, particularly in U.S. and…show more content…
Furthermore, financial institutions, such as Citigroup, Goldman Sachs, Lehman Brothers, AIG and Moody’s, designed some new credit derivatives which were subprime lending. Subprime lending is a special loan for low-income workers and lower credit people to help them buy housing, but the loans resulted in a debt crisis. Another huge area of debt was a result of other instruments. For instances, CMO’s, CDO’s, SIV’s and MBS’s are kinds of financial derivatives that millions of people paid trillions of dollars for. However, there were not the only reasons for crisis, government has responsibility for the market as well, but the American government implemented policy to support financial institutions, and permitted loose regulation of the market. Consequently, the risk in financial markets was intensifying. Ameriquest collapsed on 31 August 2007, the largest subprime lender in America. Reuters (2007) reported that “Ameriquest downsized in the current housing cycle, deciding in May 2006 to close all 229 retail branches and cut 3,800 jobs”. There were several mortgage companies and banks failing followed by this; Others were bailed out by governments. The U.S. Federal Reserve injected 41 billion dollars for banks to borrow at a low rate and to support whole financial market. But this was
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