How Banks Went Broke : A Look Into The Financial Crisis Of 2007-2008

The 2008 financial crisis had multiple causes but the most outstanding to me is the passing of the Gramm–Leach–Bliley Act. This act repealed Glass – Steagall which removed the safeguards that came between commercial and investment banks. It destroyed regulation between the two and gave unprecedented “innovation” which allowed millions of Americans to purchase homes they couldn’t really afford. This created the American housing bubble that eventually popped do to citizens being unable to pay for their new homes. The intial burst of the housing bubble resulted in the foreclosure of 860,000 homes in 2008. Another entity at fault for the recession would be the credit rating companies. They provided the means to the consumers to take out mortgages

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The financial crisis from2007 to 2008 is considered the worst financial crisis since the Great Depression of the 1920s and destroyed the U.S. economy severely. It led the housing prices fell 31.8%, the unemployment rate rose a peak of 10% in the United States. Especially the subprime market, began defaulting on their mortgage. Housing industry had collapsed. This crisis was not an accident, it caused by varies of factors. The unregulated securitization system, the US government deregulation, poor monetary policies, the irresponsibility of 3 rating agencies, the massed shadow banking system and so on. From my view, the unregulated private label mortgages securitization is the main contribute factor which led the global financial crisis in 2008.

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.

There are many research institutions that are quick to point the finger and blame one specific entity or event for the events that occurred during the economic decline in 2008; however, the entire situation cannot be put onto the shoulders of one company, or the faults of one industry. There were several causes that played into the financial crisis, but two causes stand out as the pre-dominant elements of the collapse of major financial establishments: manipulation of the housing market by two government-funded companies, and the greed of wealthy Wall Street bankers and investors who knowingly took advantage of the system.

The largest banking institution in the United States, Bank of America, has been characterized with numerous controversies in the recent past. While the institution only got bigger since the financial crisis and government intervention through bailouts, Bank of America headed towards collapse. In 2011, Bank of America experienced several protests of its branches by various groups like National People's Action, US Uncut and other progressive activists (Jaffe par, 1). These protests were fueled by the groups' anger at Bank of America's tax dodging, huge bonuses that were paid after government bailouts, foreclosures, and other harmful practices. These protests contributed to increased concerns on whether the too-big-to-fail behemoth would really collapse.

The financial collapse is a very complex issue rooted in multiple causes, making it hard to put into a single sentence. However at it’s core the reason for the collapse is that many investors and banks tried to get rich by taking on assumptions about the housing market and taking on huge risks that they didn’t realize the full extent of.

Firstly, here are some major issues that lead to the housing crisis and the economic collapse. The financial crisis happened because banks were able to create too much money, too quickly, and used it to push up house prices and speculate on financial markets (Financial, 2015). This is a result of investors wanting more mortgages to make more money. Global investors wanted a low risk investment that paid in return. Brokers would sell

The main cause of this worldwide economic contraction was the credit crunch in 2007/2008. In the United States, mortgage lenders received incentives to sell mortgages, regardless of the income and credit score of the individual receiving the loan. This lead to an influx of loans being sold that were likely to be defaulted on at a later date. These subprime mortgages proved to be very profitable for the mortgage companies; thus, in order to continue selling these mortgages, they consolidated the debt and sold it to financial intermediaries. Therefore, the loans were no longer being financed through the traditional banking model.

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

According to the specialists, there are many reasons for this global financial crisis. We try to focus some prime reasons behind this

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.

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Connor, Flavin and O’Kelly (2010), Stated that Deregulation of Financial Markets & Large Capital flow (Bonanza) were two of the four main reasons of both US & Irish Bank Crisis.(Ref 1. Connor, Flavin and O’Kelly (2010), the other two being Irrational exuberance & Moral Hazard.