The 2008 Financial Crisis Analysis

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is commonly referred as the Dodd-Frank Act. This act was passed as a response to the Great Recession in order to prevent potential financial debacle in the future. This regulation has a significant impact on American financial services industry by placing major changes on the financial regulation and agencies since the Great Depression. This paper examines the history and impact of Dodd-Frank Act on American financial services industry.

The Federal Government needs to make sure to enforce strict guidelines on who can and cannot be accepted for a home loan, and not allow big investors to borrow excessive money at low interest rates to inflate the investor’s financial advantage. If the government starts allowing lower standards on mortgages, we are going to end up in the same catastrophe once again. In an article written by U.S. News and World Reports entitled Should the Federal Government Provide Support to the Mortgage Market?, the Federal government and the President attempted to get involved with the housing market. The passage implicated that Obama wanted to do away with federally funded conglomerates Fannie Mae and Freddie Mac and implement another type of government assisted program ("Should the Federal Government"). The program would prevent the mistakes made by Fannie and Freddie which created the original “housing bubble burst” ("Should the Federal Government"). One of the Senate bills suggests the government create “a new agency, the Federal Mortgage Insurance Corporation to replace Fannie and Freddie” ("Should the Federal

On June 27, 1934, President Franklin Roosevelt signed the National Housing Act, with the goal to improve the housing standards and conditions, as well as provide a mutual mortgage insurance system. It came at a time when at least half of the nation’s home mortgages were in default, millions of people were losing their homes, and the construction industry was halted. This law in turn created the Federal Housing Administration (FHA). The FHA set standards for construction and underwriting, and it provided mortgage issuers, such as banks and private lenders, a federal guarantee of repayment. The purpose of this was to revive mortgage lending for house construction, home improvement projects, and home purchases. Not only did the FHA’s program

However, it is clear that these unethical practices served as catalyzers of the financial crisis. Even though many financial institutions that could be held responsible for the 2008 crisis no longer exist and that legislation, as the Dodd-Frank, has been passed in order to further regulate financial institutions, many of the institutions responsible for the crisis are still in the core of the economy, controlling a very big part of it. It might be impossible for the general public to fight against a possible future recession, as the power of an individual is close to insignificant in comparison to the power of an established financial

Chapter 3: Causes of the Financial Crisis and the Slow Recovery Wallison, Peter J. "Is the Dodd-Frank Act Responsible for the Economy's Slow Recovery from the Financial Crisis and the Ensuing Recession? *." Https://www.hillsdale.edu/.../uploads/2016/02/FMF-2015-Dodd-Frank.pdf. Ninth Hillsdale College Free Market Forum, 16 Oct. 2015. Web. 20 Mar. 2017.

The Federal Reserve had began lowering interest rates from 6.5% in the late 2000, all the way down to 1% in November of 2003 and kept it there until June of 2004. These artificially low interest rates encouraged consumers to buy houses and builders to produce more houses. However, the low interest rate was not an accurate reflection of the true demand for houses in the marketplace. At the same time, Congress amended the Community Reinvestment Act, encouraging banks to offer mortgages to lower income borrowers who would ordinarily not qualify for a loan. In addition, the Federal Government required Fannie Mae and Freddie Mac, the now two infamous government sponsored lenders, to provide over half their mortgages to low-income buyers, also known as subprime mortgages. Essentially, this meant that banks and other mortgages lenders were told to relax their lending standards, and provide mortgages to people who

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed to redesign numerous areas of the US regulatory system and to protect consumers against mortgage companies, banks, and other entities that were gambling and taking excessive risks with the consumers’ financial assets7. The act promised to restore America and create new jobs for those who had lost everything during the financial crisis of 2008. When the crisis occurred, Wall Street “did not have the tools to break apart or wind down a failing financial firm without putting the American taxpayer and the entire financial system at risk,” and Washington did not have the power to oversee and limit the risk-taking behavior that was taking place at the time7. The act is composed of sixteen titles, each one can be considered a powerful law individually; however, the act comprised them all together to have a major impact on the economy.

FDR’s affordable housing initiative was responsible for the rapid expansion of home ownership throughout the United States (Allen and Barth, 2012). This was accomplished in part through the creation of The Federal National Mortgage Association, which provided affordable low down payment mortgages extended over a 30-year period of time. Over the past several decades the United States economic policy has been to encourage home ownership (Bluhm, Overbeck and Wagner, 2010).

The relative successes and failures of that Act are becoming more apparent with time, and the shortcomings are subject to intense partisan criticism. As discussed below, Dodd-Frank seeks to address the highly sensitive and controversial notion that Wall Street banks have been designated by the Federal Reserve as too-big-to-fail. In fact, during the most severe moments of the crisis, the voices of free market proponents could be heard advocating that these troubled big banks, suffering massive losses due to their own bad bets, and if weakened to the point of failure, should be allowed to fail. Hindsight shows that allowing just one to fail, Lehman Brothers, had serious and lasting detrimental effect on the US and global financial system and markets. Had Lehman been saved, it would have been the most effective agent to unwind all of the transactions and trades to which it was a party, and likely in a rapid manner. However, being thrust into bankruptcy, and thereafter receivers were appointed to unwind the business, took months upon months and vast resources to settle Lehman accounts. Had Citibank, Bank of America, Bear Stearns, or AIG been allowed to fail, it may have been possible that the US financial system would have melted down completely. So these super banks, and non-banks, cannot be allowed to fail in crisis, due to the system-wide risk. Notwithstanding, such an implicit assurance, that they will always get a bailout, no matter how toxic

In 2001, the United States endured a short unexpected decline in the economy. With the terrorist attack at 9/11 and accounting scandals, a decline in the U.S economy was an obsession in the minds of the American people. However, in order to keep things at peace, the Federal Reserve determined that they will lower the Federal funds 11 times. The rate was then lowered from 6.5% to 1.75% in a matter of one year. This allowed bankers the power to award more borrowers with loans even if they had no job, income, or even assets. Even with no way of obtaining any income the dream of buying a home became a reality. It wasn’t long before everything became way cheaper.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Obama on July 21, 2010 as a response to the financial crisis of 2007-08. From an economic standpoint the overall consensus leading to the financial crisis can be linked to not only greed, but to ‘excessive deregulation’ and the “finanicialization of everything” (Knight 2015). Supposedly, the failures were due to the financial sector being funded by debt, which already sounds unethical and a poorly planned system. Prior to Dodd-Frank legislation was the Banking Act of 1933, which had similar intentions of providing stability. However, the Act was eaten away over time and companies weren’t as strictly regulated (Acharya 2013).

Another economist by the name of Thomas Sowell stressed that the government’s role in creating the housing bubble. With the housing markets that had the largest home price increases were often markets that the local government had forced land use restrictions on the amount of land available for housing. Having relaxed mortgage lending standards were mainly the result of being government influenced (Russo). During the 2008 recession, the Federal Housing Administration increased its insurance activity to keep money flowing into the market. Without this government agency’s backing, it would have been much more challenging for the middle class to get a home loan from the start of the recession (Griffith). A few large financial firms experienced financial stress during the 2008 Recession and in response, the Federal Reserve provided the liquidity and support through a variety of programs motivated to help the functions of financial markets and institutions, and in effect limit the damage done to the U.S. economy. The Federal Reserve had provided record amounts of monetary accommodation in response to the severity of the reduction and the gradual return of the ensuing recovery. Finally, the financial crisis caused major reforms in banking and financial regulation, which included congressional legislation that significantly affected the Federal Reserve. One example is the

One of the main arguments against banks becoming too big to fail is that a moral hazard problem occurs. Moral hazard is a basic economic concept, whereby one party entering a transaction will take more risky actions if they know they have insurance against the outcomes of those actions. At present, too big to fail banks have a variety of systems emplaced by the government, which protect them in the event that they run into financial difficulty. For example, in the U.S. the banks’ creditors get federal deposit

In this essay I will be addressing the “Too Big To Fail” (TBTF) problem in the current banking system. I will be discussing the risks associated with this policy, and the real problems behind it. I will then examine some solutions that have been proposed to solve the “too big to fail” problem. The policy ‘too big to fail’ refers to the idea that a bank has become so large that its failure could cause a disastrous effect to the rest of the economy, and so the government will provide assistance, in the form of perhaps a bailout/oversee a merger, to prevent this from happening. This is to protect the creditors and allow the bank to continue operating. If a bank does fail then this could cause a domino effect throughout

The housing crisis in 2007-08 was characterized by the low classes being unable to pay for their mortgages. The housing bubble, reaching its greatest size in 2006, prepared this particular crisis. Decisions made by financial institutions combined with consumers’ decisions about borrowing played major roles in the inflation and burst of the bubble. Many decisions were made because of political influence. Yet, it is as Thomas Sowell stated in his book The Housing Boom and Bust that, “There was no single dramatic event that set this off… A whole series of very questionable decisions made by many people, in many places, over a period of years, built up the pressures that led to the sudden collapse of the housing market and of financial institutions that began to fall like dominoes as a result of investing in securities based on housing prices.” Sowell continues, “The causes of the housing boom and bust have been as general as the flaws and shortcomings of human beings and as specific as the effects of Federal Reserve System policy on interest