Summary: The 2008 Financial Crisis

In 2008, the world experienced a tremendous financial crisis which rooted from the U.S housing market; moreover, it is considered by many economists as one of the worst recession since the Great Depression in 1930s. After posing a huge effect on the U.S economy, the financial crisis expanded to Europe and the rest of the world. It brought governments down, ruined economies, crumble financial corporations and impoverish individual lives. For example, the financial crisis has resulted in the collapse of massive financial institutions such as Fannie Mae, Freddie Mac, Lehman Brother and AIG. These collapses not only influence own countries but also international area. Hence, the intervention of governments by changing and

Ultimately these lenders mortgages to people with poor credit and a high risk to default. Lenders were willing to make give out these subprime mortgages for countless reasons. Firstly these lenders had large amounts of funds to lend because strong economy leading up to recession. With this abundant capital lenders were willing to make riskier loans to help increase their investment returns. Lenders also thought these subprime mortgages were less risky than usual because rates were low, the economy was healthy and in general individuals were making their payments. The amount of subprime mortgages went from 173 billion in 2001 to 665 billion in 2005. A second reason for why lenders were giving out these subprime loans is due to personal greed and selfishness. Many heads of banks made huge bonuses based on high volumes and fraudulent appraisals. One way these lenders were able to do more volume was through mortgage fraud for profit. Mortgage fraud for profit is a illegal practice committed by industry professional who misrepresent or omit important information about their client’s employment, income, credit or property value with the goal of maximizing their own profits. The FBI found 63,713 cases of mortgage fraud during the year of 2008 alone and 46,717 during the year of 2007. They found out that in many low-credit, low income ZIP codes buyer income was overstated

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

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

The financial crisis of 2007–2008, also known as the Global Financial Crisis and 2008 financial crisis, is considered by some economists such as Nouriel Roubini, professor of economics and international business at New York University, Kenneth Rogoff, professor of economics and public policy at Harvard University, and Nariman Behravesh, chief economist and executive vice president for IHS Global Insight, to have been the worst financial crisis since the Great Depression of the 1930s. All of them agreed that this is a “one in fifty years event”, however the latest Great Recession is not a typical cyclical recession of the World Economy and no doubt will last for more that usual two years (Business Wire, Reuters). The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of U.S. dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. (M. N. Baily, D. J. Elliott, 2009). So what are the cаuses of this crisis? Mаny factors dirеctly and indirectly caused the Great Recession, with expеrts plаcing different weights upon pаrticular causes. Major cаuses of the initial sub-prime mortgage crisis and following recession include: Internаtional trade imbalances and tax lending stаndards contributing to high levels of dеveloped

The subprime mortgage crisis was a result of mortgage brokers selling mortgage products to people with terrible credit, no down payments for the house, no stable income into the home, and basically no nothing instead of selling it to responsible people who they knew would not default on their mortgage. (Let’s call the reliable homeowners prime and the unreliable ones sub-prime for times sake). They would give out home mortgages to everyone knowing that they wouldn’t be responsible for the mortgage that they give out, but that they would be able to sell them to investment bankers, who would then sell them to investors, hedge funds, etc or at least be left with a house as housing prices always rise. But let’s start from the beginning of how this whole mess started.

The roots of the crash trace back to U.S. regulatory and governmental activity. Thirty years prior, at the birth of financialization and Ronald Reagan’s Administration, certain policies started to favor banks’ activities, particularly with respect to the practical dissolution of antitrust laws during the time and a general

The 2008 financial meltdown resulted in the most treacherous investment landscape observed since the great depression. The most notorious issue was the subprime mortgage crisis, which had a ripple effect felt through every market in the world. The banks, whose leverage rate should never have been higher than two times capitalization, surged as high as thirty to forty times market cap. With this level of exposure, any unforeseen market fluctuations could mean disaster. Lehman Brothers, the oldest investment bank on Wall Street, went bankrupt and thousands lost their jobs. Outside of finance, thousands of companies in the United States and abroad had to fire significant portions of their workforce, thus furthering the economic decline and plunging the US into an economic recession. In the late 1990s, Congress repealed the legislation separating commercial and investment banks, which resulted in investment banks overreaching their bounds. The Emergency Economic Stabilization Act of 2008 was enacted due to the effects of the subprime mortgage crisis, which allowed the US Treasury to spend billions of dollars to bail out the investment banks by purchasing distressed assets. However, the bailout plan has created a debate over whether it was a good idea for the government to bailout the investment banks. Also, if the government fared better or worse in the years following the bailout.

The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929, despite efforts by the Federal Reserve and Treasury Department. Housing prices fell 31.8 percent, more than during the Depression. Two years after the recession ended, unemployment was still above 9 percent (Amadeo, 2017).

The financial crisis of 2008 turned the world upside down. It is said to be the worst financial situation for the United States since the Great Depression in the 1930’s. Millions of people all over the country lost their jobs, retirement funds, and even houses. After all this chaos and distress, the United States government still bailed out the banks that were supposedly ‘too big to fail’. There were many things that attributed to the big banks going under. Some of the factors that caused these banks to crash were high risk transactions, a very complex financial market, and even the lack of regulation throughout the industry (DeGrace). Although these played a large role in the

This almost brought down the world’s financial system, and threatened the collapse some of the large financial institutions. Which luckily was prevented by the bailout of banks by national governments, but left the stock markets to fend for themselves, thus causing global drop. It took huge taxpayer-financed bailouts to shore up the industry. Even so, the ensuing credit crunch turned what was already a bad turn out into the worst recession in 80 years. In 2008 the world economy faced its most dangerous crisis since the Great Depression of the 1930s. The contagion, which began in 2007 when sky-high home prices in the United States finally turned decisively downward, spread quickly, first to the entire U.S. financial sector and then to financial markets overseas. The American economy is built on credit, and because of this credit went unchecked and got out of control. Many people were taking out loans, mortgages became simple. Many people got rich and wanted more. Banks made a cut on the sale, then packaged the mortgage with a group of other mortgages and erased all personal responsibility of the loans. The housing market eventually declined, causing massive losses in mortgage backed securities. Many banks and investment firms began losing money. This also caused a massive amount of homes on the market which lowered housing prices and slowed

Banks were also overvaluing some of the subprime mortgages making a false assumption that housing prices would continue to rise. Subprime loans are loans that are made to individuals who have complications in trying to maintain a more scheduled payment. Individuals who are going through certain hardships in their life such as divorces, unemployment, etc. Most of these investment banks preferred subprime loans because they carried higher interest rates which led to a massive increase in predatory lending. The reason why banks were creating such complex policies were so that anyone who planned to take out a loan would have difficulty translating the documents therefore allowing the banks the take advantage of homeowners without or if any repercussions.

This created a toxic situation where people took out a mortgage loan, with a high rate, could not pay it back creating a bubble to where the investment banks had no one else to lend to, and needed to be bailed out. Banks became rich and borrowed heavily to create more loans to create more short term money that became the big investment banks bonuses. This created a global panzi scheme.

There were several financial crises in our modern world, some say the 2008 is still being felt. After the great depression, depository activities and investment activities were kept separate. Depository activities hold and facilitate the exchange of securities - investments such as bonds which allow investors to own assets without taking possession, meaning they can be easily traded. In 1999, the financial services modernization act eliminated this separation. Therefore financial companies began connecting depository activities with investment activities. For example, Wall Street sold collections of mortgages to investors and made large profits. Lenders had to give out more loans but since they have already given loans to borrowers with good

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