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 In the late 1990s, Congress repealed the legislation separating commercial and investment banks, which resulted in investment banks overreaching their bounds.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.
Many factors that led to the crash of the financial markets in 2008. Liberals and conservatives have differing views on the reasons for this crisis. From 1980 to 2007, deregulation, HUD, the Community Reinvestment Act (CRA), and bank management pushing banks to make high risk loans caused the market to shatter. Hedge funds contributed a humongous portion of the market crash. A commission of conservatives and liberals was established to try get to the bottom of how the stock market crashed. The name of the commission to conduct this study is Financial Inquiry Commission.
The recession of 2008, which we are only just starting to come out of, happened as a result of a few major factors. The primary factor was the deregulation of banks during the Bush administration. Another factor was that banks offered loans without looking into the financial stability of borrowers or businesses. Also, credit unions, savings and loans, and banks entered into competition with each other. The Security and Exchange Commission, S.E.C., reduced requirements so that banks could pile up debts.
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
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 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 financial crisis did not happen in a day or two, it was triggered by a variety of events that happened.in years ago. In year 1998, The Glass-Steagall legislation was repealed, it is a legislation that separated investments and commercial banking activities in the financial sector. This act then allowed banks in the US to act in both the commercial and investment fields, which allowed them to participate in highly risky business. This is somehow responsible for the mortgage-backed derivatives, which is a main cause of the
There is much speculation that the Fed help caused the crisis because it kept its policy rate to low due to fear of deflation. Ben S. Bernanke, who was the chairman of the Federal Reserve during the crisis, defends the Fed by saying “The collapse of house prices interacted with vulnerabilities in both the private and public sectors to produce the crisis.” (Hoover.org) It is hard to determine whether or not the Fed helped caused the crisis, but it is certain they had a part. During the crisis the Fed decided to bail out investment bank, Bear Stearns and insurance company, AIG, while letting Lehman Brothers fail without a bail out. This was because AIG and Bear Stearns where considered too big to fail, while Lehman Brothers was considered insolvent and the Fed felt that they did not have legal authority to do so. When Lehman Brother collapsed it led to a market panic, in response the Fed extended the discount window to non-bank financial institutions and financial markets. They also provided funding for money market mutual funds. Bernanke argues that these policies help prevent a global financial system crash.
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
In 2008 the United States experienced the worst financial crisis since the Great Depression in the 1930s, primarily because of the bursting of the U.S. housing bubble and increasing default rates on subprime mortgages which caused the price of house to increase once a high amount of loans were given out by banks to potential homeowners. Securitization played a big role in this because of how risky the regulations are and the giant corporate companies that are truly fluctuating and controlling the market. At the peak of the financial crisis new specialized mortgage lenders and securitizers came along unrestricted by government regulations which resulted in an extreme number of foreclosures and the stock market to plummet.
How could this happen? What were the reasons for the accelerated failure of the financial market, bankruptcy of major financial institutions and massive loss of jobs in USA? How could regulated organizations that drive the finance wealth of this country collapse and cause an aggressive recession that left many Americans without homes, jobs and in with an uncertain future? How
Credit rating agencies were giving anything that came across their desk AAA ratings in order to not lose out on competition, real estate agents and mortgage brokers were giving houses and loans to people who couldn’t afford them, and the major banks who held long positions on the mortgage-backed securities were knowingly holding worthless bonds at the expense of the American people. It was the perfect storm for a financial crisis, as there was no one saying “no, we can’t be doing this.” The banks were colluding with rating agencies to rate their securities well until they exited their long position, the rating agencies were receiving good business from the banks, and the mortgage brokers and real estate agents were too ignorant to realize what was going on on the macro
In 2008, the stock market crash began. Many people couldn’t afford to buy anything in the time being because of the financial crisis.The financial crisis was even worst then the Great Depression of the 1930s. Many people lost their employments and received low payment from their jobs. The financial crisis actually began in early 2006 because of the subprime mortgage market in the United States, which increased the rate of non-payment. The federal reserve and the treasury department put a stop to the United States banking system from being crumpled. The financial crisis in 2008 caused a lot of economic turmoil because of the increased of unemployment rate and the mortgage crisis.
What caused the financial crisis to happen? The origin of the crisis, the film argues, can be traced back to the 1980s, when the process of deregulation was eagerly implemented under the Reagan Era. Prior to the emergence of Reaganomics, the financial industry was tightly regulated following the Great Depression. Most of the banks were local and were prohibited from speculating customers’ deposits (brought by the Glass-Steagall Act), while the investment banks were modest and private. However, everything changed after 1980, when Ronald Reagan became president and the U.S economy entered a thirty-year phase of deregulation. Financial institutions, which included commercial and investment banks then embarked on the process of maximizing profit by making risky investments with the depositors’ money. By the end of the decade, saving and loans companies went bankrupt, causing tax payers to lose more than one hundred billion dollars. However, the government did not implement any reform and deregulation continued to take place under the Clinton
The financial industry had factors such as changes in the policy framework governing it and the banking practices that seriously contributed to the financial crisis in 2008. Older regulations designed to control systemic