The Financial Crisis Of 2008 : Deregulation And Corruption

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 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 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

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 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

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

The financial crisis of 2007-2008 was one of the worst economic downturns the United States has faced since the Great Depression of the 1930s. It affected the banking industry by causing banks to squander money on mortgage defaults, bringing interbank lending to halt, as well as affecting credit being provided to consumers. Another effect was that it caused certain businesses to essentially run out or come to an end. Many companies had to take advantage of bailouts, but the economic was still in disarray. The financial crisis also affected the country in the long-term by bringing about new regulatory programs such as Dodd-Frank Wall Street Reform and Consumer Protection Act (Singh, 2015).

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.

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

Financial crisis of 2008, started in 2001 after the U.S. economy went through “a mild, short-lived recession” (Financial Crisis 2007/2008 Overview). To start things off, the crisis happened because of one major reason; mortgages. When someone is trying to buy a house, they need to take out a huge sum of money from the bank. In return, the bank acquires a piece of paper called a mortgage. Then, every month, the new home owner will need to pay to bank, or whoever is the owner of that paper mortgage, a small portion of that mortgage plus a small interest. Banks like this because they can not lose. They either will make their money back plus interest or if the home owner defaults, does not make their payments to the bank each month, the bank will get the house which they will then sell to someone else.

Economists cite a plethora of reasons on why the Global Financial Crisis started. However, most economists can agree that the bursting of the U.S housing bubble, irresponsibility practiced by regulators and financiers, greed of banks, lack of leadership from central banks, complex chains of debt, and the credit crunch led to what is referred to as the largest crisis since the Great Depression.

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

During 2008, a series of economic disasters led to a worldwide debt crisis. All over the world, interest rates were at a record low. These low rates “fuelled domestic spending and spurred inflation in wages and goods” which encouraged people to take out loans and spend money they did not have (The Causes: A Very Short History of the Crisis). These easy credit conditions led to a debt bubble that inevitably burst with worldwide consequences. Following the collapse of the US mortgage market, Lehman Brothers filed for bankruptcy. Although Lehman Brothers was based in the US, they served as a worldwide investment bank with a large European contingent. Their collapse, along with the enormous amounts of worldwide debt, led to what is now known

Prior to formally entering the financial crisis, a range of signs forecasting this event had happened around the world. Problems with short-term debt funding and mortgaged assets were not limited to the United States, which is also the underlying cause of the financial crisis (Stoeckel, 2009). In 2001, the U.S economy fell into recession after the dotcom crisis and the terrorist event on September 11. To encourage the consumption, the central bank had lowered interest rates. The result was that with interest rates so low, investment and consumption became too easy, the U.S financial markets rapidly back and created "real estate bubble". Started from the housing market, the crisis quickly spread to the entire U.S financial system bank. In 2007, the 4th biggest bank in the U.S, name Lehman Brothers was under pressure. Lehman tried many different ways to save itself such as raise capital, sign a deal with Morgan Stanley and Bank of America, merger with Barclays but none of it worked ("Financial Crisis 2007/2008 Overview," 2011). From here, everything was ready for the crisis explosion in September 2008.