The 2007-2008 Financial Crisis: Causes, Impacts and the Need for New Regulations

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THE 2007-2008 FINANCIAL CRISIS:
CAUSES, IMPACTS AND THE NEED FOR NEW REGULATIONS

The initial cause of the financial turbulence is attributed to the U.S. sub-prime residential mortgage market. The sustained rise in asset prices, particularly house prices, on the back of excessively accommodative monetary policy and lax lending standards during 2002-2006, increased innovation in the new financial instruments, unusual low interest rates resulted in a large rise in mortgage credit to households; particularly low credit quality households, the greed of investors’ for ever higher returns coupled with very minimal down payments, along with the dependence on major global rating agencies, allowed complex investments products to be sold to an
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These corporations are known as the “monoline” insurers or “monoline” guarantors, and it became another casualty of the financial crisis. Globally, many financial institutions had purchased these new promising guaranteed of debts. But, every good item has a bad side, and several of these factors started to emerge alongside one another. Insolvency on one of these institutions could threaten the solvency of many others. When the “monoline” insurers started to fall into insolvency problem, the market was illiquid. Suddenly, emerging financial institutions were short of cash, as well as become insolvent. Some of the affected are such Goldman Sachs, Merrill Lynch, and Bear Stearns. But, at the end of the day, the worst effected from this financial crisis were the mortgage borrowers. Most of these “monoline” insurers did not have adequate capital to fulfill their guarantee promises. Investors’ dependence lied mostly on the high ratings placed by major global rating agencies for these institutions put the investors in a position where they could experience enormous losses. In order to survive, many banks turned to sovereign wealth funds to obtain new capital. Bad news continued to pour in from all sides. In August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the U.S borders. Lehman Brothers filed for bankruptcy, Bear Stearns was acquired by JP Morgan Chase,
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