Financial Innovation Is Constantly Reshaping The World

2137 Words Aug 12th, 2014 9 Pages
Financial innovation is constantly reshaping the world. However, the subprime crisis since 2008 has drawn great attention all over the world, highlighting the limitations and hazards of financial innovation. The financial turmoil began in the United States, at which time, the subprime mortgage lenders were going bankrupt, investment funds were forced to close and the value of the stock declined significantly. According to Sánchez, the Deputy Governor of Mexican Central Bank, the subprime crisis since 2008 was mainly caused by the phenomenon that the innovation of many complex financial instruments were extensively used without appropriate regulation (Sánchez, 2010). As financial innovation involves a large number of products and cannot analyze all of them, this essay will only focus on MBS, which has been one of the most important and widely-used financial innovation since the 1960s. By the end of 2006, the total amount of MBS was $6.4 trillion, 49% larger than the market for Treasury debt (Fabozzi, Bhattacharya and Berliner, 2010).

Although MBS is only one form of financial innovation, this essay aims to demonstrate that it was a major contributory factor to the subprime crisis in 2008. The first part will introduce the background of MBS, then analyze the reason for the subprime crisis. After that, it will find out problems the financial crisis exposed. Finally, it will recommend building a regulatory system to reduce the risk of MBS. It will be argued in this essay that…
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