Recession and Resulting Banking Failures

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.

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 Glass-Steagall Act came into existence largely due to the stock market crash of 1929 and the Great Depression. The crash and its aftermath caused Americans to lose faith in the banking system. Glass-Steagall attempted to restore the public’s faith in banks by separating commercial banking from investment banking and providing insurance on bank deposits. The Act worked as intended but its effects slowly diminished over the next 67 years and deregulation in the banking industry culminated with the enactment of the Gramm-Leach-Bliley Act in 1999 by then President Bill Clinton.1 The GLBA gutted Glass-Steagall and ended restrictions on intermingling between commercial and investment banking.1 Many believe the GLBA was a major cause of the financial crisis that erupted in 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 This act repealed Glass – Steagall which removed the safeguards that came between commercial and investment banks.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

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 banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

The underlying problems that caused the financial crisis of 2008 began building before many economists and policymakers are willing to admit. Since the laissez-faire policies of the Reagan administration in the 1980s, inequality and unemployment heightened. “Between 1976 and 2006 (...) ation-adjusted per capita income increased by 64 percent, for the bottom 90 percent of households it increased only by 10 percent. For the top one percent of households it increased 232 percent,” (Wisman 2013, 932) causing an income gap. Another arsing issue was globalization after World War II. The economy’s structure changed and outdated previous economic policy. Manufacturing jobs were outsourced because labor was cheaper abroad; the US imported more goods than it exported, causing a trade deficit.

The Great recession in 2008 was the worst recession since the Great Depression. The bursting of an eight trillion dollar housing bubble started it but at the same time lead to a loss in business investment. It was also caused by a stock market crash and bad loan that caused many people to lose some of their family wealth dramatically. The Great Depression had a four percent fall in domestic gross product and the unemployment rose to ten percent. The Great Recession also leads to the largest expansion and a two-thirds tax cut.

The two largest modern bank runs in American history were the Savings & Loans Crisis of the 1980’s and the Financial Crisis in 2008-2009. Both crises left permanent scars on our financial system and provide important lessons moving forward. In this paper, I will provide a comparative analysis of the various causes, economic effect and regulatory responses, in an attempt to perhaps display a pattern for these crises that we can lean on to prevent future ones. Ultimately, the analysis yielded that at the core both crises were caused by regulatory negligence, attempting to cheat the system and government policy mistakes regarding financial policy, all contributed to the rise of these crises. Both had detrimental economic effects, and both regulatory

I concluded six months ago (Truman 2008) that there was no shared diagnosis of the origins of this crisis. Nothing that I have heard or read since then has convinced me otherwise. If anything, disagreements have become more intense, in the meantime. This fact hampers our ability to learn the proper lessons from this crisis. This fact also means that it is useful for me to declare my own biases in advance. Conventionally, causes of this financial crisis include some or all of the four following elements: macroeconomic policies, financial-sector supervision and regulation, financial engineering, and the global activities of large private financial institutions. The context for each element is the United States or other similarly advanced countries.

The Global Financial Crisis, also known as The Great Recession, broke out in the United States of America in the middle of 2007 and continued on until 2008. There were many factors that contributed to the cause of The Global Financial Crisis and many effects that emerged, because the impact it had on the financial system. The Global Financial Crisis started because of house market crash in 2007. There were many factors that contributed to the housing market crash in 2007. These factors included: subprime mortgages, the housing bubble, and government policies and regulations. The factors were a result of poor financial investments and high risk gambling, which slumped down interest rates and price of many assets. Government policies and regulations were made in order to attempt to solve the crises that emerged; instead the government policies made backfired and escalated the problem even further.

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.

Since the financial crisis burst, there have been various theories about whom to blame for it and who is the main person or institution responsible for this crisis which still has effects upon the entire population from all over the world.

Since the advent of the subprime crisis in 2007 that it is commonly believed to have led to the Great recession and to the present global financial crisis, these issues have been subject to much research. In fact, no one can claim that the Great Recession and the global financial crisis have been under-researched. In fact, the new world recession has been analysed from different angles and perspectives. Historians, economists, financial experts, psychologists, anthropologists and other experts in academic, financial, economic and other fields of research are still analysing the contemporary global financial crisis.

At first, nobody foresaw what was about to happen to the economy. The economy at first was at a state of peace and unity. People were taking loans and purchasing houses and these houses were increasing in value. The banks were giving out loans to the people to purchase the houses and earning money on the interest of those loans. That is when people began to notice the advantages of what could be taken from this economic situation. With a new method of earning money quickly and easily, it is no surprise that everybody began to try and use the same methods. Soon enough, the Financial Crisis of 2007-2008 was born into reality. But the real question is, what were the main causes of the 2007-2008 financial collapse?